WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Accounting Tutorials » Budgeting Tutorials » Flexible Budget

Flexible Budget

Flexible Budget Definition

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 manager’s efficiency and effectiveness because it is set to benchmark for the actual performance of the company.

It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs. A flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity.

Flexible Budget

Important Aspects

  • When preparing a Flexible budget, managers are forced to consider the different scenarios and their responses to them. Thus, for a number of different situations, managers will have calculated their costs and revenues. If an unexpected event does occur, changing the level of activity, the management will be better prepared.
  • Budgetary control is the comparison of the actual results against the budget. Where the actual level of activity is different from that expected, comparisons of actual results against a fixed budget can give misleading results.
  • These budgets are different in different levels of activities, which facilitate the ascertainments of fixation of cost, selling prices, and tendering of Quotations.

Categories of Expense

Example of Flexible Budgets

This example has the following details provided by a factory expected to operate at 70% level of activity (i.e., 14000 hrs)-

  • Variable Expenses: $2,520
  • Semi-Variable Expenses: $2,400
  • Fixed Expenses: $3,600

Now, between 85% and 95% of activity level, its semi-variable expenses increase by 10%, and above 95% of activity level, they grow by 20%. Prepare a flexible budget for the three scenarios wherein the activity levels are 80%, 90%, and 100%.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Solution:

flexible budget example 1.1

We have noticed that the recovery rate (Budgeted hrs/Total expenses) at the activity level of 70 % is $0.61 per hr. If the factory works 16000 hrs in a particular month, the allowances @ $0.61 will come put to be $9,760, which is not correct. As shown in the above table, the accurate allowance is computed to be $8,880.

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. Only the purely variable expenses vary proportionately with the activity level.

Thus, if the actual expenses exceed $8,880 by $X in the month with an 80% activity level, it would mean that the company has not saved any money but has overspent $X more than the budgeted amount.

Situations to use Flexible Budgeting

  • 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 budget in place.
  • In the case where the business totally depends upon Mother Nature, i.e., rain, dry and cold, the flexible budget helps the business to estimate there output considering the good or adverse weather conditions. For example, agricultural activities, wool-based industries, etc.
  • In case of a business which carries their entire work with the help of laborers. The laborers’ availability is a critical factor for these types of companies. Therefore it helps the management to accurately know about their productivity and output, for example, jute factories, handloom industries, etc.

Advantages

  • It can help in sales, costs, and profit calculation at different levels of operating capacity.
  • It helps to determine the quantity/amount of output to be produced to help the company achieve the desired profit level.
  • The most significant advantage of this budget is that it helps the management of the company to determine the production level in different market and business conditions.
  • It also helps in the reclassification of various levels of budgeted costs along with sales so that managers can easily identify the profit areas and thus may act accordingly.
  • This budget can be re-casted on the basis of the activity levels. It is not rigid.

Disadvantages

  • This budget requires skilled workers to work on it. The availability of skilled workers becomes a challenge for the industry. Therefore, many Industries and companies can’t use this budget despite its enormous advantages.
  • It depends upon the proper accounting disclosures. The result cannot come out to be correct if there are any mistakes in the Books of Accounts provided. A flexible budget depends very much upon a forecast of the past business performance. So the historical information used needs to be accurate.
  • It is an expensive affair. Skilled workers are to be appointed, and they should be paid for their services. It’s quite a laborious task too. Thus many companies and industries can’t afford to have this 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.
  • Variance Analysis provides useful information as each cost is analyzed according to its nature. Thus it becomes difficult for the experts to prepare Flexible budgets.

Conclusion

A flexible budget can be found suitable when the business conditions are constantly changing. Accurate estimates are expected from if the resources are available with the experts.  A big organization should hire experts to prepare a flexible budget and to help their organization make a clear vision about what output should be produced to achieve the targeted profit.

Recommended Articles

This has been a guide to Flexible Budget and its Definition. Here we discuss a flexible budget example along with the advantages and disadvantages. You can learn more about budgeting from the following article –

  • Capital Budgeting
  • Master Budget Definition
  • Traditional Budgeting
  • Zero Based Budgeting
9 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More