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. 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 is static. Companies that are static, execute the same sort of transactions can significantly 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 effectiveA Flexible Budget Is Very EffectiveA flexible budget refers to an estimate which varies with the change in production activity or volume. Such a budget is more realistic and flares the managerial efficiency and effectiveness as it sets a benchmark for the actual corporate performance. for companies who go through a lot of changes during a particular period. It is much more complicated than the fixed budget too.
Fixed vs Flexible Budget Infographics
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.
|Basis for Comparison||Fixed Budget||Flexible Budget|
|1. Meaning||A 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 preparation||It 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. 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 the 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 is it estimated?||A fixed budget is mostly estimated on assumptions and anticipations.||A flexible budget is prepared with realistic situations in mind.|
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.
This has been a guide to the Fixed vs. Flexible Budget. Here we discuss the top differences between Fixed and Flexible Budget along with infographics and comparative table. You may also have a look at the following articles for gaining further knowledge in Corporate Finance –