define flexible budget

Flexible budgeting can also go a long way in updating a budget for which revenue and other figures are yet to be factored in. Managers can use this opportunity to verify all fixed costs and variable expenses before any production operation commences. A flexible budget acts as an ideal financial planning tool in business settings whereby costs are closely aligned to underlying business activities. Retail environments would be ideal in this case whereby any overhead activity or cost can be separated and treated as if they were a fixed cost.

The consumer may “cut the cord” and use an à la carte, Internet-based streaming service for a lower monthly cost than the bundled packages offered by satellite and cable companies. Or, the truly budget-conscious can buy an inexpensive digital antenna and watch broadcast television for free. Decide a range of activity for which the budget is to be prepared. The following steps or stages are involved in the define flexible budget preparation of flexible budget. Just make sure that you are actually using it to build good financial responsiveness, not using it to break good financial habits. It helps in variance analysis after comparison with the actual results and measure the performance of various departments. It helps to determine the quantity/amount of output to be produced to help the company achieve the desired profit level.

Main Differences Between Static Budget And Flexible Budget

However, before deciding to switch to the flexible budget, consider the following countervailing issues. It makes provision for the co-ordination of cash about total working capital sales, investment, and debt. Master Budget is the summary budget incorporating its component functional budgets, which is finally approved, adopted and employed. A budget is a blueprint of the plan of action to be followed during a specific time for attaining some decided objective. Planning involves developing goals and preparing various budgets to achieve those goals. To help incentive the electronic format and streamline access to the latest research, we are offering a 10% discount on all our e-books through IGI Global’s Online Bookstore.

  • While preparing a static budget it is assumed that there will be no fluctuations in the reporting period while a Flexible budget is designed to adapt to changes.
  • It is also called a variable budget because it adjusts with the change in cost driver activities.
  • If actual volume is lower than planned, then costs will be lower, which looks like a good thing, but may not be if your sales are down.
  • What is the department total budgeted cost, assuming that the department uses flexible budgeting?

Functional Budgets relate to functions of the business such as product sales etc. In other words, Functional Budgets are prepared in respect of various functions performed in a business. If the sales budget is inaccurate, the rest of the budget will be inaccurate. The sales budget is based on the company’s sales forecast, which may require the use of sophisticated mathematical models and statistical tools. The final integration of all functional budgets by the Budget Officer provides the Master Budget. When functional budgets have been completed, the Budget Officer prepares the Master Budget.

As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company’s operational, financial and business management issues. James has been writing business and finance related topics for work.chron,, and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.

Types Of Budget Based On Time

Flexible budgets react more quickly to adverse conditions. Suppose the budget was set up with the expectation that sales would be $200,000 per month and labor cost was budgeted at $50,000 per month, or 25 percent of sales. Variable costs$7,000Fixed costs$10,000Prepare a flexible budget for capacity level of 80% and 90%.

There are two types of budgets namely fixed budget and flexible budget. The flexible budget will vary with each activity level and adjusted when the actual activity level is determined. Thus, the cost manager can use a flexible budget as a reference tool for measuring the variance with the actual performance and result. The ever-changing business environment and the shorter product life cycle impose the need to develop new forecasting models and replace static budgets with flexible budgets. Thus, the analysis of deviations from budgeted costs becomes a desideratum of any entity.

The flexible budget will show different possibilities for variable expenses and revenue. Variable costs can include marketing and sales, and may also include the cost of materials, number of sales, and shipping costs.

A few years ago we as a company were searching for various terms and wanted to know the differences between them. Ever since then, we’ve been tearing up the trails and immersing ourselves in this wonderful hobby of writing about the differences and comparisons.

Classification Of Budget

For example, if sales were to increase dramatically, flexible budgets would get adjusted to increase spending on marketing to take even more advantage of unexpected increases in revenues. The flexible budget can be used for the determination of budgeted sales, costs, and profits at different activity levels. Flexible budget enable an organization to predict its performance and income levels at a given range of sales levels and activity levels. It can be seen the impact of changes in sales and production levels on revenue, expenses and ultimately income. Initially, a new venture can’t predict demand for its product accurately; hence, a flexible budget can be of great help. So, it can prepare flexible budgets with different levels of output based on the analysis of the demand for a similar product.

This accounts for any changes in both the company’s revenue and staff that may occur throughout the year. The flexible budget amount for a specific level of activity is determined differently depending on whether a cost is variable or fixed. This budget is put together before the year starts, and is a static budget. We can’t use it for accessing if costs are being effectively controlled. The flexible budget shows an even higher unfavorable variance than the static budget. This does not always happen but is why flexible budgets are important for giving management an indication of what questions need to be asked.

After the cash budget is prepared, the budgeted income statement and then the budgeted balance sheet can be prepared. Jake is now working on a flexible budget for his sales department! His supervisor gave him to green light to keep selling and keep paying his sales people!

Why Is Flexible Budget Prepared?

Therefore, many Industries and companies can’t use this budget despite its enormous advantages. Flexible budgets enable more accurate assessment of managerial and organizational perfor­mance. Fixed cost, for example, rent, insurance premium, etc. remains the same every month, irrespective of the actual machine hour used. Your browser will redirect to your requested content shortly. It indicates the need to arrange for short-term borrowing, or the availability of idle cash for investment.

define flexible budget

Prepare the budgets for each level of activity with corresponding costs. Determine the cost behavior pattern (Fixed, Variable and Semi-variable) for each element of costs that are included in the flexible budget. A flexible budget also can help you to keep your budgeting lifestyle-friendly. When unexpected expenses crop up, it’s easy to respond by pulling back from everything unnecessary in your life. By moving your money around you can see exactly how the numbers will work out, and can make sure to keep quality of life priorities from disappearing entirely. A flexible budget will help you track where you can adjust spending each month. This is particularly important when you’re hoping to build savings or work towards a larger financial goal.

Master Budget

In the case of an advanced flexible budget, expenditures might vary with certain ranges of revenues as well as other activities that have an impact on production. The biggest advantage to a flexible budget is that it more accurately reflects the state of your finances. The alternative, static budgeting, can’t account for unexpected expenses or changing income. In business, a flexible budget is one that you adjust based on changing costs and revenue. You build your budget at the beginning of the fiscal year, accounting for how much money your business has, needs and expects to make. The columns would continue below with fixed and variable expenses, allowing you to see how your net profit changes based on changes in actual production and revenue.

After you get used to flexible budgets, they will become one of your favorite management tools. 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. It consists of two parts – the first is the fixed cost and the fixed cost portion of the semi-variable cost.

define flexible budget

For example, a restaurant may serve 100, 150, or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? Similar scenarios exist with merchandising and manufacturing companies. To effectively evaluate the restaurant’s performance in controlling costs, management must use a budget prepared for the actual level of activity. It helps in setting the expected costs, revenues, and profitability of the business.

In What Situations Will A Static Budget Be Most Effective In Evaluating A Manager’s Effectiveness?

A discretionary expense is a cost that is not essential for the operation of a home or a business. Julia Kagan has written about personal finance for more than 25 years and for Investopedia since 2014.

In brief, a flexible budget is a budget that distinguishes the behavior of fixed and variable cost that changes. And changes that happen with the level of activity attained, or change in the revenue or other variable factors. A flexible budget is a budget or financial plan of estimated cost and revenue for different levels of output.