Difference Between Fixed and Flexible Budget

Fixed and Flexible Budget Differences

In case of the Fixed Budget there is no change in the budget of the company because of the change in the level of activity or the output level, whereas, in case of the Flexible Budget, changes happen in the budget of the company whenever there is any change in the level of activity or the output level.

There are two kinds of the budget in cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more that differ in scope, nature, and usefulness. We call these fixed budget and flexible budget.

Fixed-and-Flexible-Budget

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Fixed vs Flexible Budget Infographics

Fixed Budget vs Flexible Budget

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Key Differences Between Fixed and Flexible Budget

  • A fixed budget is a budget that doesn’t change due to any change in activity level or output level. The flexible budget is a budget that changes as per the activity level or production of units.
  • The fixed budget is static and doesn’t change at all. Flexible budget, on the other hand, is adjustable as per the necessity of the business.
  • A fixed budget is always fixed. That means it is the same for any activity level. Flexible budget, on the other hand, is semi-variable. One part of it is fixed and another change as per the activity level.
  • The fixed budget is very simplistic. A flexible budget is pretty complicated.
  • The fixed budget takes comparatively little time to prepare. Flexible budget, on the other hand, takes a lot more time.
  • A fixed budget is estimated on the past data and the anticipation of management regarding future events. Flexible budget, on the other hand, is estimated on the basis of realistic situations.
  • A fixed budget isn’t advantageous to medium and large enterprises but only suitable for micro-organizations. A flexible budget is suitable for all kinds of organizations – from micro to large.

Comparative Table

Basis for ComparisonFixed BudgetFlexible Budget
1. MeaningA fixed budget is a budget that remains static irrespective of the activity level.A flexible budget is a budget that changes as per the necessity of activity level.
2. What it’s all about?The fixed budget doesn’t change as per the fluctuations of business.Flexible budget changes as per the fluctuations of business;
3. Nature A fixed budget is always static.A flexible budget is very dynamic.
4. Simplicity Pretty simple.Quite complex.
5. Ease of preparationIt is easy to prepare a fixed budget.It is quite tough to prepare a flexible budget since one needs to prepare for all situations.
6. ConsequencesThe dissonance between the actual level and the budgeted level is quite high since there is no similarity in activity levelThe dissonance between the actual level and the budgeted level is quite low.
7. ComparisonComparison is difficult since the activity levels are different at the actual level and budgeted level.Comparison is quite easy since the activity levels are quite similar.
8. RigidityPretty rigid, no fluctuation is taken into account.Quite flexible, almost every fluctuation is taken into account.
9. How is it estimated?A fixed budget is mostly estimated on assumptions and anticipations.A flexible budget is prepared with realistic situations in mind.

Conclusions

By comparing the fixed budget and flexible budget, we get an idea about which one is more useful and more applicable. Even if a fixed budget is elementary to prepare, ideally, it’s not an excellent method of budgeting to be precise; because fixed budgeting doesn’t leave room for fluctuations.

On the other hand, flexible budgeting is very much adjustable to the situations of business. As a result, the business doesn’t need to incur losses. That’s it’s prudence to use flexible budgeting no matter what scale of business you’re in.

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