Flexible Budget Definition, Example

a flexible budget is appropriate for

And their availability is a crucial factor in opting for a flexible budget. It helps in assessing the performance of the management and key production personnel. Thus, it increases the efficiency of the employees. It perhaps goes without saying that computers are extremely helpful in preparing budget information that is easily flexed for changes in volume.

The management might assign a 7% commission for the total sales volume generated. Although with the flexible budget, costs would rise as sales commissions increased, so too would revenue from the additional sales generated.

While variances are noted in static budgets, a flexible budget allows you to enter the revenues and expenses relevant to that particular budget period, adapting flexible costs using real-time data. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures. Then the budgeting staff completes the remainder of the budget, which flows through the formulas in the flexible budget and automatically alters expenditure levels. At its simplest, the flexible budget alters those expenses that vary directly with revenues. There is typically a percentage built into the model that is multiplied by actual revenues to arrive at what expenses should be at a stated revenue level.

When flexible budget is prepared, actual cost at actual activity is compared with budgeted cost at actual activity i.e., two things to a like basis. In this method, the budget takes a tablet form, where horizontal columns represent the different levels of activity or capacity.

a flexible budget is appropriate for

This is used to present users with ads that are relevant to them according to the user profile.test_cookie15 minutesThis cookie is set by doubleclick.net. The purpose of the cookie is to determine if the user’s browser supports cookies. CookieDurationDescriptionakavpau_ppsdsessionThis cookie is provided by Paypal. The cookie is used in context with transactions on the website.x-cdnThis cookie is set by PayPal. Let’s suppose the production machinery had to operate for 4,500 hours during February. Flexible budgets adapt to the changing needs of a company. Static budgets are often used by non-profit, educational, and government organizations since they have been granted a specific amount of money to be allocated for a period.

Construction Management

Unfavorable direct-labor rate variance, due to the need for a more highly skilled labor force.  Enable management to improve planning and decision making.  Improve the analysis of actual results. Again, the cost drivers bookkeeping would depend on the governmental unit and budget items selected. DataRails is an enhanced data management tool that can help your team create and monitor budgets faster and more accurately than ever before.

a flexible budget is appropriate for

Analyze cost behavior trends, whether fixed, variable, or mixed. Estimate the range of expected activity for the period. Its production equipment operates, on average, between 3,500 and 6,500 hours per month.

In What Situations Will A Static Budget Be Most Effective In Evaluating A Manager’s Effectiveness?

If 5,000 machine hours were necessary for the month of January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the machine hours in February are 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March has 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). Activity-based costing may solve the problems described in requirement 2 and therefore is an alternative that Aunt Molly’s should consider. Since direct labor does not seem to have a direct cause-and-effect relationship with variable overhead, the company should try to identify the activity or activities that drive variable overhead. If the same proportion of these activities is used in all of Aunt Molly’s products, then ABC may not be beneficial. However, if the products require a different mix of these activities, then ABC could be beneficial.

a flexible budget is appropriate for

As a result, Mooster’s Dairy might prepare an advance flexible budget based on many different scenarios. If such predictive planning is not possible, there will be a disparity between the static budget and actual results. In contrast, a flexible budget might base its marketing expenses on a percentage of overall sales for the period. That would mean the budget would fluctuate along with the company’s performance and real costs. Static budgets may be more effective for organizations that have highly predictable sales and costs, and for shorter-term periods.

Identify Which Costs Are Variable And Which Costs Are Fixed

Any level of activity.Control of direct labor and direct materials but not fixed factory overhead.Show ResultCorrect – Your answer is correct. 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.

For example, telephone expenses may vary with changes in headcount. If so, one can integrate these other activity measures into the flexible budget model. D. Efficient or inefficient use of the cost driver (e.g., machine hours) for variable overhead. The procedure for drawing up a flexible budget is quite straight forward. The flexed budget is only accurate, if costs behave in a predicted manner.

It is also known as a fixed budget. A flexible budget is a great performance evaluation tool when used with a static budget. It is essentially a way to comprehensively account for the static budget’s cost variance. You can keep your flexible budget expenses to a minimum by offering performance incentives to your employees, as long as they are directly related to sticking to the static budget.

  • For example, if sales were to increase dramatically, flexible budgets would get adjusted to increase spending on marketing to take even more advantage of unexpected increases in revenues.
  • This allows business leaders to be proactive in making adjustments throughout the period to help return operations to the static-budget mean.
  • Control of direct labor and direct materials but not fixed factory overhead.
  • These are the kinds of questions management needs answers to.
  • This is because the fixed expenses don’t change irrespective of the activity level and the semi-variable expenses do change but not in proportion to the activity level.
  • July of 20X9 was hotter than usual, and Mooster found itself actually producing 105,000 gallons.

In this article, we will explore what a flexible budget is, the advantages and disadvantages of flexible budgeting and how you can create this type of budget for your business. While accounting software is an important part of tracking all of your financial transactions, many software applications simply don’t have the capability of preparing a flexible budget. Expenses such as rent, management salaries, and marketing costs remain static and do not change based on production. a flexible budget is appropriate for While preparing any budget at all is always better than not having one, a static budget does not prepare you for revenue and expense changes in real time. Changing costs in the manufacturing process can severely impact your profit margin. Any unexpected market shifts may find a material essential to your production line suddenly costing more than three times the original budgeted amount. Both static and flexible budgets are designed to estimate future revenues and expenses.

If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. General and Administrative Expenses. This flexible budget is unchanged from the original because it consists only of fixed costs which, by definition, do not change Certified Public Accountant if the activity level changes. For example, if you build your static budget based on 1,000 units, but only produce or sell 600 units, the static budget is off. The flexible budget allows you to account for that change, accurately reflecting the situation for 600 units. It works the other way, too – if you end up needing to produce 1,400 units, you can use the flexible budget to scale up your total cost.

Flexible Budget Is Appropriate For

A flexible budget is actually a series of several budgets prepared for many levels of operating activity. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results. This flexibility is important if costs vary with the activity level. Thus, a flexible budget is particularly appropriate for control of direct labor and direct materials , but is not necessary for control of fixed factory overhead. By definition, overhead costs do not change as activity levels change.

Preparation Of A Flexible Budget

Computer-integrated manufacturing systems have resulted in a shift from variable toward fixed costs. In addition, as automation increases, more and more firms are switching to such measures of activity as machine hours or process time for their flexible overhead budgets. Flexible budgets act as a benchmark by setting expenditure at various levels of activity. And the estimates of expenses developed via a flexible budget helps in comparing the actual cost incurred for that level of activity. Hence any variance identified helps in better planning and controlling.

When To Use A Flexible Or Static Budget

For example, a company that has little to no cost of goods sold and has a set overhead cost each month will likely not benefit from a flexible budget plan. This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels. This means that the variances will likely be smaller than under a static budget, and will also be highly actionable. Control of fixed factory overhead but not direct materials and direct labor.Control of direct materials and direct labor but not selling and administrative expenses.

Accounting Topics

Variable-overhead spending variance. Variable-overhead efficiency variance. Fixed-overhead efficiency variance. Variable-overhead volume variance. Basing the flexible budget on the number of binoculars produced would not be meaningful.

A company producing seasonal products can opt for a flexible budget. Here the level of activity varies from time to time, either due to its nature or variation in demand. Therefore, It makes sense to make a flexible budget.

It also depends upon the factors of the production, which are not in the hands of the management. Therefore the predictions can be inaccurate due to these conditions. In the case of a typical business, if it is newly started, it becomes tough to predict the demand for the products/services accurately. But this can be dealt with by putting a Flexible bookkeeping budget in place. Enter your email below to begin the process of setting up a meeting with one of our product specialists. You have to be honest with yourself. If your executives don’t have the heart to say no, even when there are funds available to take on an unbudgeted project, flexible budgeting may not be the solution for your organization.

An unfavorable variable-overhead spending variance does not imply that the company paid more than the anticipated rate per kilowatt-hour for electricity. An unfavorable spending variance could result from spending more per kilowatt-hour for electricity or from using more electricity than anticipated, or some combination of these two causes.

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