What Is Flexible Budget? What is the difference between flexible and fixed budget? In what situations, flexible budgeting is useful or being used? What are the steps involved when preparing flexible budget?
A flexible budget is a budget which is designed to change in accordance with the LEVEL OF ACTIVITY attained. [ see illustration how to compute the flexible budget]
It is also known as Variable budget as the budget recognizes the difference in cost behavior namely fixed and variable costs in relations to fluctuations in output or turnover. The budget is designed to change appropriately with such fluctuation.
For a fixed budget, the budget remains unchanged irrespective of the level of activity actually attained.
The fixed budget is prepared based only on one level of output.
Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise.
For some companies, due to the nature of business does not suit fixed budget preparation:
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So, what are the difference between Fixed and Flexible Budget? They are:
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For example, a fixed budget is set with a planned 8,000 hours but an actual 10,000 hours are recorded, from both the motivational or control point, it is difficult to gauge theĀ efficiency of the manager(s) who are involved in the manufacture of the output at that actual level; |
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The steps involve in the preparation of the flexible budget as follows:
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