It is defined like a budget which is created to remain the same irrespective of the level of activity gained. Creating the ideal budget arrangement will involve considering both a fixed and strategy, ultimately choosing the approach that will produce the greatest level of benefit. The performance report may be misleading and will not contain very useful information. This part of the process is identical to creating a static budget; management should determine what those expenses will be and fill them into the budget as fixed items. While preparing a flexible budget, first of all, the costs are divided into three major segments, namely: fixed, variable and semi-variable where semi- variable costs are further classified into fixed and variable cost, and then the budget is designed accordingly.
One part of it is fixed and another change as per the activity level. For example, management may determine that marketing expenses should be equal to 15% of revenue each quarter. Variable To accurately classify costs as fixed or variable and calculate accordingly, managers must assess the behavior of a cost in relation to revenue within a predetermined range. The flexible budget rearranges the master budget to reflect this new number, making all the appropriate adjustments to sales and expenses based on the unexpected change in volume. Where large part of output is intended for export. Actual revenues or other activity measures are entered into the flexible budget once an has been completed, and it generates a budget that is specific to the inputs.
Static budgets are relatively simple to develop and implement and allow the company to assess singular instances of expense during a specified period. About the Author Tiffany C. Consequences The dissonance between the actual level and the budgeted level is quite high since there is no similarity in activity level The dissonance between the actual level and the budgeted level is quite low. Since there is nothing to compel company owners to spend all of the funds allocated to each line item, it is possible to use a fixed budget approach and achieve a balanced budget for the year. Variable costs may be represented as percentages of some base figure such as number of units or revenue. This implies that in those situations in which output and sales cannot be correctly estimated, fixed budget does not suit. At its simplest, the flexible budget alters those expenses that vary directly with revenues.
In such a case the budget cannot be used for the purpose of cost control. In the real world, change is real and it is constant. Maximum managerial control may be exercised by making comparisons with actual operating figures Fig. For example, if the company sees that it can sell off more of its products by expending more in advertisement costs, a flexible budget would help execute that. Such a situation may arise in the following cases as flexible budget example: 1. Flexible Budget is best suited for the organisation where there is a high degree of variability in sales and productions, or the industries which can be easily affected by the external factors or fluctuations in the market conditions are relatively high etc. Most costs exhibit characteristics of both fixed and variable characteristics.
Disadvantages of Flexible Budget : The procedure for drawing up a flexible budget is quite straight forward. In short, flexible budgets are more practical, realistic and useful. I think that businesses that need to keep a close eye on costs and that have changing production volume must use a flexible budget. To prepare a flexible budget, you need to have a master budget, really understand cost behavior, and know the actual volume of goods produced and sold. Costs cannot be ascertained if there is a change in the circumstances.
In flexible budgeting, a series of budgets are prepared for every major level of activity so that whatever is the actual level of output, it can be compared with appropriate budget or can be interpolated between budgets of the activity levels on either side. In the case of the , a cost per unit may be used, rather than a percentage of sales. These points make the flexible budget an appealing model for the advanced budget user. Flexible Budget Overview A flexible budget calculates different expenditure levels for , depending upon changes in actual revenue. Keeping Costs Down The fixed budget inevitably keeps costs down so long as the business abides by the strict financial limits placed upon the entire business. It is sometimes referred to as a multi-volume budget. The definition of dark energy is still not precise and known properly.
However, some businesses use flexible budgets, which vary the expense level with the dollar amount of sales. Rigidity Fixed Budget cannot be modified as per the actual volume. However, before deciding to switch to the flexible budget, consider the following countervailing issues. But with a flexible budget, the budget manager knows how things are going throughout the term and can make changes to the budget along the way for the most realistic picture. With the fixed expenses taken care of, next management should turn to the variable expenses.
To facilitate development of the departmental expense budgets for inclusion in the profit plans. Identifying these relationships help businesses understand how to inject the operating capital into the company to optimize profits while controlling, or at least minimizing variance in, cost. Meaning of Flexible Budget 2. Where nature of business is such that sales are difficult to predict e. To construct a flexible budget, the first step is to identify and budget for fixed expenses. Login details for this Free course will be emailed to you Fixed Budget vs Flexible Budget — Key differences As you can see there are multiple differences between fixed budget and flexible budget.