Fixed Budget vs Flexible Budget Differences
There are two kinds of budget in cost accounting that differ in scope, nature, and usefulness. We call these fixed budget and flexible budget.
- A fixed budget is a kind of budget where the income and the expenditure are pre-determined. Irrespective of any fluctuation or change, this budget would remain static. Companies that are static, execute the same sort of transactions can greatly benefit from a fixed budget. But wherever there are fluctuations, a fixed budget doesn’t turn out to be the most suited one.
- Flexible budget, on the other hand, is a budget that is flexible as per the needs of the hour. 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. That’s why a flexible budget is very effective for companies who go through a lot of changes during a particular period. It is much more complex than the fixed budget too.
In this article, we will go through comparative differences between fixed vs flexibile budget.
Fixed Budget vs Flexible Budget Infographics
As you can see there are many differences between fixed budget vs flexible budget. Here are the most important ones depicted below –
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Fixed Budget vs Flexible Budget – Key differences
As you can see there are multiple differences between fixed budget and flexible budget. Let’s look at the key differences between these –
- Fixed budget is a budget that doesn’t change due to any change in activity level or output level. Flexible budget is a budget that changes as per the activity level or production of units.
- 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.
- Fixed budget is always fixed. That means it is 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.
- Fixed budget is very simplistic. Flexible budget is pretty complex.
- Fixed budget takes comparatively little time to prepare. Flexible budget, on the other hand, takes a lot more time.
- 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.
- Fixed budget isn’t very useful to medium and large enterprises. It is only suitable for micro-organizations. Flexible budget is suitable for all kinds of organizations – from micro to large.
Fixed Budget vs Flexible Budget (Comparison Table)
|Basis for Comparison – Fixed budget vs flexible budget||Fixed Budget||Flexible Budget|
|1. Meaning||Fixed budget is a budget which remains static irrespective of the activity level.||Flexible budget is a budget which changes as per the necessity of activity level.|
|2. What it’s all about?||Fixed budget doesn’t change as per the fluctuations of business.||Flexible budget changes as per the fluctuations of business.|
|3. Nature||Fixed budget is always static.||Flexible budget is very dynamic.|
|4. Simplicity||Pretty simple.||Quite complex.|
|5. Ease of preparation||It is easy to prepare fixed budget.||It is quite tough to prepare flexible budget since one needs to prepare for all situations.|
|6. 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.|
|7. Comparison||Comparison is difficult since the activity levels are different at actual level and budgeted level.||Comparison is quite easy since the activity levels are quite similar.|
|8. Rigidity||Pretty rigid, no fluctuation is taken into account.||Quite flexible, almost every fluctuation is taken into account.|
|9. How it is estimated?||Fixed budget is mostly estimated on assumptions and anticipations.||Flexible budget is prepared with realistic situations in mind.|
By comparing fixed budget and flexible budget, we get an idea about which one is more useful and more applicable. Even if fixed budget is very easy to prepare, ideally, it’s not a good 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 a business. As a result, 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.
This has a been a guide to the top differences between fixed budget vs flexible budget. Here we also discuss the fixed budget and flexible budget differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Corporate Finance –