Flexible budget.

Content

Defination

Characteristics of Flexible Budgets

Advantages of Flexible Budget

Dis-Advantages of Flexible Budget

How it Works ?

How To Prepare ?

Flexible Budget Formulas

Defination

A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities

Characteristics of Flexible Budgets

May be prepared for any activity level in the relevant range.

Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons.

Help managers control costs.

Improve performance evaluation.

Advantages of Flexible Budget

A flexible budget enables the management to analyze the deviation of actual output from expected output.

The management can compare actual costs at the actual volume with the budgeted costs at the actual volume.

The flexible budget provides a correct basis for comparison between actual and expected costs for an actual activity

Flexible budget helps to fulfill the objectives of cost control as it shows where the actual performance deviated from the planned performance.

Dis-Advantages of Flexible Budget

Formulation. Though the flex budget is a good tool, it can be difficult to formulate and administer.

Closing delay. You cannot pre-load a flexible budget into the accounting software for comparison to the financial statements. 

Revenue comparison. In a flexible budget, there is no comparison of budgeted to actual revenues, since the two numbers are the same.

How it Works ?

To Flex a budget, we need to know that:

1. Total variable costs change in direct proportion to changes in activity.

2. Total fixed costs remain unchanged within the relevant range.

How To Prepare ?

To decide the range of activities for which the budget is to be prepared.

To determine the cost behavior i.e. fixed, variable or semi-variable.

To select the activity level for preparing the budget.

To prepare flexible budget at each selected levels.

Flexible Budget Formulas

The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant range) as is the master budget.

The flexible budget incorporates effects on each cost and revenue caused by changes in activity.

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