Definition of a flexible budget a flexible budget is a budget that adjusts or flexes with changes in volume or activity. Learn vocabulary, terms, and more with flashcards, games, and other study tools. A flexible budget adjusts to changes in actual revenue levels. A flexible budget also estimates costs and profitability for different sales levels, which can aid in decisions such as whether to accept a large, unanticipated order. Flexible budget practical problems and solutions play. Difference between fixed budget and flexible budget with. Flexible budgets work well as a performance evaluation tool in conjunction with a static budget and are basically a comprehensive accounting of the static budget s cost variance. Importance or advantages of flexible budget accounting. It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs. Flexible budget expenditures can be stymied by offering employee performance incentives directly relating to staying on the static budget. Fixed budget is static in nature while flexible budget is dynamic. For example, a flexible budget may make 6% more money available to its research and development department if its revenue increases 6%.
Mar 14, 2019 flexible budget overview a flexible budget adjusts to changes in actual revenue levels. Flexible budgets financial definition of flexible budgets. Flexible budget definition, fixed budget, flexible budget. For example, a restaurant may serve 100, 150, or 300 customers an evening. This budget is drawn for one level of activity and one set of conditions. Mar 09, 2019 problem 1 prepare a flexible budget for the production of 80% and 100% activity on the basis of the following information.
Oct 17, 2017 a definition of flexible budget with examples. Confusing budgets are simple because they provide one figure within which someone must remain. Jul 26, 2018 the following are the major differences between fixed budget and flexible budget. The designers of the budget made it flexible deliberately. A flexible budget enables the management to analyze the deviation of actual output from expected output.
In contrast to a fixed budget, a flexible budget is one which is designed to change in relation to the level of activity attained. The flexible budget of expenditure shall be adapted to foreseeable changes which may arise in the volume of activity carried out by the enterprise. A flexible budget is one that takes account of a range of possible volumes. The flexible budget will decrease if the company actually produces fewer units than planned.
It is designed to change in relation to the level of activity actually attained. Flexible budget financial definition of flexible budget. A flexible budget is a type of variable budget that predicts the production or output based on a changing level of business activities. A flexible budget is a budget that changes according to business or activity volumes. Actual revenues or other activity measures are entered into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs. Pdf the budgetary process includes all the management levels, being.
Chapter 14 performance evaluation using flexible budgeting. A flexible budget is a set of alternative budgets for different expected levels of activities i. A flexible budget works for people who work on commission or who have expenses that vary widely. If the flexed budget is compared with the actual results for a period, variances will be much more meaningful. Apr 27, 2014 flexible budget is budget typically in the form of an income statement that is adjustable to any level of activity such as units produced or units sold. Flexible budget is a budget which, by recognizing the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover, or other variable factors, etc. In a simple flexible budget, fixed costs stay constant whereas variable and semivariable costs change according to a standard predetermined at the beginning of an accounting period.
A flexible budget is a budget or financial plan that varies according to the companys needs. The result is a budget that is fairly closely aligned with actual results. Concept and meaning of flexible budget accountingmanagement. World business council for sustainable development and the international finance corporation. This should not be confused with budget contingency that includes amounts for costs that are difficult to plan or predict.
A flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity. They remain unchanged from the amounts established at the t. Thus, a flexible budget might be developed that would apply to a relevant range of production, say 8,000 units to 12,000 units. Priory pegamoid limited produces a range of parts for industrial weaving machines. A flexible budget makes different amounts available to departments depending on what production or sales are realized. It has been defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained. To this end we can use the method of maximum and minimum points. The flexible budget is a budget which can be easily adjusted according to the output levels. But, flexible budgets can also be useful planning tools if prepared in advance. Flexible budgets are one way companies deal with different levels of activity. A flexible budget allows a business to make changes based on the level of activity. A flexible budget, also called a variable budget, is financial plan of estimated revenues and expenses based on the current actual amount of output. The important advantages of flexible budget are as follows.
Flexible budget is a forecast of expenditure of a centre of analysis established for different assumptions of the activity level. Under a flexible budget the budgeted amount of manufacturing overhead will increase if the company produces more units than planned. Under this approach, if actual production slips to 9,000 units from a projected 10,000 units, the manager has a specific tool i. The flexible budget illustration for moosters dairy was prepared after actual production was known. In this respect, it is superior to a static or fixed budget. After you adjust for the change in production level, skates variance is suddenly favorable.
The cost allowances for each expense are able to vary as sales or production vary. Apr 16, 2014 o flexed budget flexible budget revised at actual activity level is flexed budget. The usefulness or importance of a flexible budget depends very much on the accuracy of the classification of expenses into fixed, semifixed and variable ones. The budget is then compared to actual expenses for control purposes. A flexible budget is defined as a budget that adjusts or flex for modify according with respect to change in the volume of activity. Chapter 9 standard costing, flexible budgeting and variance. The budget sales and prime costs for april 20x1 for component l63a are as follows. Chapter 9 standard costing, flexible budgeting and variance analysis questions 1. A flexible budget may refer to a whole company or a department. Flexible budgets require more planning in order to track expenses and adjust for any differences between periods. They made it flexible because the specific companys or departments needs do not remain static. A budget can be a document that sets strict spending limits for your small business or a template that changes and grows with your company as you get a better handle on your income and expenses.
The next step is to combine the variable and fixed costs in order to prepare a new overhead budget report, inserting the new flexible budget results into the overhead budget report. Why use a flexible budget a flexible budget will change each month. The underlying flexible budget definition is that, a budget is of little use unless cost and revenue are related to the actual volume of production. Original budget is revised to reflect the effect of variable elements, and step fixed costs at actual output. In the content of this article we emphasize the importance of flexible budgeting of expenses for an economic entity. While this tool is useful for performance evaluation, it does little to aid advance planning.
A flexible budget allows you to cut or increase spending, depending on marketplace and. This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels. A flexible budget adjusts based on changes in actual revenue or other activities. The flexible budget basic tool of the management control in the economic entities 7 semivariable costs are budgeted starting from their fixed and variable part from the previous year. In other words, a flexible budget uses the revenues and expenses produced in the current production as a baseline and estimates how the revenues and expenses will change based on. Flexible budgeting applied to sustainability measurements ima. It takes more work at the beginning of the month, but it allows your budget to adapt to changes, such as unexpected expenses or fluctuations in income. The flexible budget is further complicated and helpful than a stationary budget, which vestiges at one amount in spite of of the amount of activity. Flexible budget is a budget that is mostly used as a static budget and basically changes with the changes occurring in the volume or activity held in production, also helpful for increasing the managers efficiency and effectiveness because it is set to benchmark for the actual performance of the company.
Flexed budget identifies the variable, fixed, semivariable and step fixed nature of costs with the change in volume. Another way of thinking of a flexible budget is a number of static budgets. The institute of cost and works accounts, england has defined a flexible budget in these words a budget, which, by recognising the difference between fixed, semifixed and variable costs is designal to change in relation to the level of activity actually attained. The flexible budget standards used are always based on actual output activity e. The flexible budget is more sophisticated and useful than a static budget. A set of revenue and expense projections at various production or sales volumes. In other words, a flexible budget uses the revenues and expenses produced in the current production as a baseline and estimates how the revenues and expenses will change based on changes in the output. A flexible budget is defined in the terminology of cost accounting, issued by the chartered institute of management accountants uk as a budget which by recognising the difference between fixed, semifixed and variable costs, is designed to change in relation to the level of activity attained. The budget, which remains constant, regardless of the actual output levels is known as fixed budget.
1587 493 1024 1513 327 911 1225 532 146 28 992 821 961 155 30 1466 1207 293 978 54 526 28 20 1311 1074 1162 993 1497 738 234 721 507 988 116 871 1112 1017 503 571 869