How does a business plan its future cash and costs, and use those plans to control performance?
Prepare a cash budget and supporting functional budgets, explain the purpose and benefits of budgeting and budgetary control, and use a flexible budget to compare actual results with a budget adjusted to the activity level achieved.
A focused answer to the SQA Advanced Higher Accounting budgeting content, covering the preparation of a cash budget and functional budgets, the purpose and benefits of budgetary control, and the use of flexible budgets to compare actual performance against a budget flexed to the actual activity level.
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What this dot point is asking
The SQA wants you to plan a business's future finances with budgets - especially the cash budget - and to use budgets as a control tool, including the flexible budget that adjusts the plan to the activity level actually achieved. The cash budget is a common extended-response question, and the written marks reward explaining the purpose and benefits of budgeting.
The cash budget
The cash budget is about timing, not profit. A profitable business can still run out of cash if money comes in later than it goes out.
The two habits that earn marks are getting the timing right and excluding non-cash items. If customers pay two months after sale, a January sale appears as a March receipt. Depreciation never appears, because no cash moves. The closing balance of one month becomes the opening balance of the next.
Functional budgets and the master budget
Most budgets are interlocking, built from the sales forecast outwards.
The sales budget comes first because output depends on demand. The production budget follows, adjusting sales for any change in finished-goods inventory. The materials purchases budget and the labour budget then derive from production. These functional budgets feed the master budget, which is the budgeted profit or loss, the cash budget and the budgeted statement of financial position. The SQA may ask you to prepare any of these or to explain how one feeds another.
Budgetary control and flexible budgets
A budget is only a control tool if actual results are compared with it fairly.
Comparing actual cost at 1,200 units against a fixed budget set for 1,000 units is unfair, because more output should cost more. Flexing the budget to 1,200 units isolates the part of the difference due to performance from the part due simply to higher volume, which is exactly what management needs to know.
The benefits of budgeting
The written marks usually ask for the purpose and benefits, summarised as the "PCMC" themes: planning (forcing managers to think ahead), coordination (aligning departments), motivation (giving targets to work towards) and control (a benchmark to measure against). Limitations are also examinable: budgets can demotivate if unrealistic, may become outdated, and can encourage spending up to the budget regardless of need.
Why this matters later
The cash budget projects forward the same operating, investing and financing flows that the financial accounting statement of cash flows reports after the fact, so the two topics reinforce each other. Budgetary control connects directly to standard costing and variance analysis, where the flexed budget is the basis for computing variances. Together, budgeting and variance analysis are the planning-and-control cycle at the heart of management accounting.
Try this
Q1. Opening cash is GBP 4,000. Receipts are GBP 30,000 and payments are GBP 26,000. State the closing cash balance. [2 marks]
- Cue. .
Q2. A fixed budget is set for 500 units at GBP 15 variable cost per unit plus GBP 4,000 fixed. Flex it to 600 units. [3 marks]
- Cue. .
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AH style: cash budget7 marksSales are GBP 50,000 in March and GBP 60,000 in April; customers pay one month after sale. Purchases of GBP 30,000 are paid in the month of purchase. Wages are GBP 12,000 per month. The opening cash balance at 1 April is GBP 5,000. Calculate the closing cash balance at the end of April.Show worked answer →
April receipts are March's sales collected one month later: GBP 50,000 (2 marks). April payments are purchases GBP 30,000 plus wages GBP 12,000 = GBP 42,000 (2 marks).
Net cash flow for April is . Closing balance is opening plus net flow: (3 marks). Markers reward applying the one-month credit lag to receipts, totalling the payments, and a correct opening-to-closing reconciliation.
AH style: flexible budget6 marksA fixed budget was set for 1,000 units with variable cost of GBP 20 per unit and fixed costs of GBP 8,000. Actual output was 1,200 units. Flex the budget to 1,200 units and state the flexed total cost.Show worked answer →
Variable costs flex with output: (3 marks). Fixed costs do not change with output within the relevant range, so they remain GBP 8,000 (2 marks).
The flexed total cost is (1 mark). This flexed figure, not the original fixed budget of , is the fair benchmark for the actual 1,200-unit cost. Markers reward flexing only the variable element, holding fixed cost constant, and the correct flexed total.
Related dot points
- Calculate and interpret cost variances - direct material price and usage, direct labour rate and efficiency, variable and fixed overhead variances, and sales variances - and reconcile budgeted profit or cost to actual through a statement of variances.
A focused answer to the SQA Advanced Higher Accounting standard costing and variance analysis, covering the material price and usage variances, labour rate and efficiency variances, variable and fixed overhead variances, sales variances, and how variances reconcile budget to actual and are interpreted for control.
- Apply relevant costing to short-term decisions - special order pricing, make-or-buy, the use of a limiting factor, and discontinuing a product - identifying relevant and irrelevant costs and ranking options by contribution.
A focused answer to the SQA Advanced Higher Accounting decision-making content, covering relevant and irrelevant costs, special order pricing, make-or-buy decisions, allocating a limiting factor by contribution per unit of the scarce resource, and the decision to discontinue a product.
- Distinguish marginal and absorption costing, calculate profit under each method and reconcile the difference, and apply cost-volume-profit analysis - contribution, break-even point, margin of safety and target profit.
A focused answer to the SQA Advanced Higher Accounting requirement on marginal and absorption costing, covering the difference between the two methods, why reported profit differs and how to reconcile it, and cost-volume-profit analysis including contribution, break-even, margin of safety and target profit.
- Calculate the cost of output using job costing for one-off or batch work and process costing for continuous production, including the treatment of equivalent units, normal loss, abnormal loss and abnormal gain.
A focused answer to the SQA Advanced Higher Accounting costing methods, covering job and batch costing for one-off work, process costing for continuous production, equivalent units for closing work in progress, and the treatment of normal loss, abnormal loss and abnormal gain.
- Appraise a capital investment using the payback period, the accounting rate of return, net present value and the internal rate of return, recognising the role of the time value of money and the strengths and limitations of each method.
A focused answer to the SQA Advanced Higher Accounting investment appraisal content, covering the payback period, the accounting rate of return, net present value and the internal rate of return, the time value of money behind discounting, and the strengths and limitations of each technique.
Sources & how we know this
- SQA Advanced Higher Accounting Course Specification — SQA (2025)