IB Business Management – 3.9 Budgets

Focus: simple budgets & variance analysis

Welcome to 3.9 Budgets

This mini-workbook sticks closely to the IB BM syllabus and the Surridge & Gillespie 3.9 chapter.

  • Step 1: Use 3.9 Overview for the big picture.
  • Step 2: Work through Budgeting basics and Variance analysis with quick checks.
  • Step 3: Complete the 3 budget practices and 3 variance analyses (simple income/expense format).
  • Step 4: Use the Flashcard studio to secure the key vocabulary.
  • Step 5: Take the 20-question quiz and review explanations.
Exam link This topic covers: cost & profit centres, constructing a simple budget, basic variances and how budgets help decision-making.
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3.9 Overview – Why businesses use budgets

Planning, coordination, control and decision-making.

A budget is a financial plan for the future. For IB BM you should be able to:

  • Explain the difference between cost centres and profit centres.
  • Construct a simple budgeted income statement (like the textbook examples).
  • Calculate and interpret basic variances (F or A).
  • Discuss the importance of budgets and variances in decision-making.

Quick check: Which statement best describes a budget?

Exam tip Use the phrase “for the forthcoming period” in a definition of a budget to make it clear it is a plan, not a historical statement.

Budgeting basics – simple budget layout

The budgeted income statement used in the IB course.

Income Expenses Net income (profit)

Typical budgeted income statement

  • Income
    • Sales revenue
    • Other income
    • Total income
  • Expenses
    • List of expense categories (e.g. materials; wages & salaries; marketing; rent; fuel and other costs)
    • Total expenses
  • Net income (or profit) = Total income − Total expenses

Cost centres and profit centres

  • Cost centre: part of the business where costs are recorded (e.g. maintenance department, IT support).
  • Profit centre: part of the business where both revenues and costs are recorded (e.g. a shop, a product line).
  • Budgets are often set for each centre to control spending and measure performance.

Quick check 1: Which item would usually appear under income in a simple budget?

Quick check 2: Net income (profit) in the budget is:

Quick check 3: A maintenance department that only records its costs is best described as a:

Quick check 4: A branch of a retail chain that has its own sales and expenses is a:

Quick check 5: Which is an advantage of using budgets?

Exam tip When asked to construct a budget, set it out clearly with income at the top, expenses grouped together, and net income at the bottom.

Variance analysis – comparing budget and actual

Simple variances in income, expenses and profit.

Variance Favourable (F) Adverse (A)

A variance is the difference between the budgeted figure and the actual figure.

  • Favourable (F): better than budget – e.g. higher income or lower expenses.
  • Adverse (A): worse than budget – e.g. lower income or higher expenses.

Variance analysis helps managers:

  • Spot areas where performance is better or worse than expected.
  • Investigate causes (e.g. higher prices, waste, external factors).
  • Make decisions (e.g. change suppliers, adjust marketing, revise budgets).

Quick check 1: Budgeted sales were $50 000; actual sales were $54 000. The sales variance is:

Quick check 2: Budgeted expenses were $30 000; actual expenses were $33 500. The expense variance is:

Quick check 3: Profit is higher than budget even though some individual expenses are adverse. This suggests that:

Quick check 4: Why is it not enough just to calculate variances?

Quick check 5: If actual wages are lower than budgeted wages, what type of variance is this for the business?

Exam tip When a question gives you both the budget and the actual, expect to calculate variances and then comment on reasons and implications.

Practice – Constructing simple budgets

Use the data for each business to complete the budgeted income statement for the next period.

Practice – Variance analysis

For each business, calculate the variances and label them as favourable (F) or adverse (A).

Flashcard studio – Budgets & variances vocab

Flip cards to move between term and definition. Focus is on syllabus language from 3.9.

End-of-topic quiz – 3.9 Budgets (20 questions)

Questions move from key definitions to simple calculations and evaluation. Each answer has a brief explanation.