Key Idea: A budget is a plan in numbers, and a variance shows where reality moved away from it. This topic is how a business splits itself into centres, builds budgets and reads the variances.
Centres
- Cost centre: a part of the business that has costs but no revenue of its own.
- Profit centre: a part with both costs and revenue, so its profit can be measured.
- At Lena's: Mill Lane is a cost centre; each shop is a profit centre.
Budgets
- A financial plan for a future period: revenue and costs, month by month.
- Built from past figures, forecasts and objectives, agreed with the manager responsible.
- Gives targets, controls spending and delegates responsibility.
Variances
- Variance = actual figure − budgeted figure.
- Favourable [F]: better for profit. Adverse [A]: worse for profit.
- Look for the reason before judging the manager.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Budget | a financial plan of expected revenue and costs for a future period | a forecast, which predicts rather than sets targets |
| Cost centre | a part of a business to which costs can be charged | a profit centre, which also earns revenue |
| Profit centre | a part of a business that earns revenue and has costs | the whole business |
| Variance | the difference between a budgeted and an actual figure | a mistake: variances are expected |
| Favourable variance | an actual figure that is better for profit than the budget | a bigger number: lower costs are favourable |
| Adverse variance | an actual figure that is worse for profit than the budget | always the manager's fault |
For a variance: actual − budget, the size in $, then [F] or [A] by asking 'is this better or worse for profit?' For a comment: the biggest variances first, a likely reason from the case, and what the manager should do.
Exam-style question
Aisha's High Street shop budgeted sales revenue of $50,000 for March 2026. Actual sales revenue was $47,000. Its wages were budgeted at $14,000 and were $14,600. Calculate the variance for sales revenue and for wages, stating whether each is favourable or adverse.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: A cost that comes in below budget is favourable, even though the number is smaller. Revenue above budget is favourable; costs above budget are adverse. Ask one question every time: does this help or hurt profit?
Tap each card to check yourself.
Cost or profit centre: the Mill Lane bakehouse? Cost centre. It bakes for the shops but sells nothing to customers itself.
Advertising budgeted at $600, actual $400. Variance? $200 [F]: the cost was lower than planned.
Why might an adverse variance not be the manager's fault? It may come from outside: a wet month, a supplier's price rise, a counter assistant off sick.
One advantage of profit centres? Each manager is responsible for a clear result, which can motivate and shows where the business earns its profit.
One disadvantage of profit centres? Shared costs such as advertising must be split between centres, and the split can seem unfair.
How do variances help decisions? They show where to look: a large adverse variance prompts a question, and the answer guides the next budget.
Exam tips
- Variance = actual − budget, then label it [F] or [A] by its effect on profit.
- Lower costs are favourable; lower revenue is adverse.
- Name a reason from the case before judging the manager.
- A cost centre has costs only; a profit centre has costs and revenue.
- Budgets set targets; variances show where to act.