This means that a flexible budget is initially based on the performance levels of a past quarter’s static budget. Using a flexible budget for the first time may therefore cause some issues with providing the right amount of resources to meet current needs. Rapidly-growing sections of a company may be underfunded, while others are over budgeted until data accumulates and flexible budgets become more accurate at tracking and supporting ongoing trends. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable.

Most businesses should take advantage of both kinds of budget. The only exception to this approach should be during business cycles when your company manages to strictly adhere to the original static budget. In this situation, the information within the static and flexible budget would be the same. Formulating and administering a flexible budget is no easy task given that most costs in a business are rarely variable. A great deal of time goes towards formulating fixed cost components and developing cost formulas that might not work in the end. 3) The method of determining the fixed and variable elements of costs is often arbitrary and hence the flexed cost bears little relation to the correct budgeted cost for the flexed level of activity. In other words, the company plans in advance, what the effect will be on revenue, expense and profits if sales and or production differ from the budget.

Disadvantages

Flexible budgets have distinct advantages over static budgets. After you get used advantages of a flexible budget to flexible budgets, they will become one of your favorite management tools.

And the second is the variable cost and variable cost portion of the semi-variable cost. A flexible budget provides cost estimates at different levels of activity. Also, a vivid classification of the expenses into different categories of fixed cost, semi-variable cost, and variable cost is necessary before preparing a budget.

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The second column lists variable costs as a percentage of the unit rate as well as the total fixed costs. The other three columns can list different output levels as well as changes in variable costs based on output. A flexible budget consists of a series of budgets for different levels of activity. It, therefore, varies with the level of activity attained.

This flexibility to adapt to change is useful to owners and managers. StoneMason 12 hours ago @serenesurface– The article described in detail the advantages and disadvantages of both budgets. I think that this is a decision that each business has to make based on its revenue, expenses and how predictable these are.

Situations for Preferring a Flexible Budget

However, variable expenses shifted considerably based on the number of customers, warranting the extra monitoring and maintenance. Once you identify fixed and variable costs, separate them on your budget sheet.

For example, say that April came in $500 more expensive than usual. You can account for that by flexing your budget to spend $500 less in May, making up for the unanticipated spending.

Track by Month

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. You can work towards automating your budget since your expenses are directly tied to your revenue. As mentioned before, this model is a much more hands on and time consuming process requiring constant attention and recalibration. Flexible budgets work by taking the pressure off to predict future happenings. More often than not, our budgets should be just as flexible as we are.

Finally, you can’t compare budget to revenue, since your budget intentionally tracks your revenue. In case of the changes in demand due to psycho-graphic factors like Taste and Fashion. Generally, the term variance refers to any kind of difference existing between two components.

Flexible Budget Advantages

At its purest form, a flexible budget alters expenses depending on how revenues change. In the case of a flexible intermediate budget, it is common to find expenditure varying on the impact of other measures other than revenues. 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. Budgets are simple because they provide one figure within which someone must remain. Flexible budgets require more planning in order to track expenses and adjust for any differences between periods. A range that changes over time can make the budgeting processing overly confusing for some users and therefore reduce the odds that they will successfully follow it. In business, a flexible budget is one that you adjust based on changing costs and revenue.

Traditionally, companies spend weeks or months creating an annual budget that’s more chiseled in stone than fluid and flexible. For the personality types that tend to be drawn to finance careers, that certainty provides a blanket of security, with its solid numbers and well-documented milestones. Flexible budget variance techniques help you create budget forecasts that make sense in a time of disruption, making it easy to course correct when needed. In this way, once a change in income is generated during the operation of the company, the possibility of calculating a new level of expenditure that must be covered by this organization is presented. Such budgets also rely on the assumption of continuity when costs may actually behave in a stepped or discontinues manner. Flexed budgets assume linearity of costs and, therefore, take no account of, for example discounts for bulk purchases of materials.

Static budgets, on the other hand, are simpler to set up and simpler to use. But https://business-accounting.net/ that ease of use means that the model is less helpful in certain circumstances.

Flexible budgets are most appropriate for businesses that operate with an increased variable cost structure, where costs are primarily attached to activity levels. Many organizations opt to use both since static budgets are good for some things and flexible budgets are good for others.

A flexible budget is a readymade comparison for cost control. Graphically, X-axis represents the level of activity, and Y-axis represents the estimated cost. The chart reads out the budgeted expenses at different levels of activity and helps in performance management. 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. With a flexible budget, it’s easy to show that while costs for a month might have been much higher than budgeted, so were sales – justifying the increase.

• Yet other expenses have considerable chance of varying to one degree or another.
• It can be seen the impact of changes in sales and production levels on revenue, expenses and ultimately income.
• Put simply, a static budget is one where the budget doesn’t change over the given period.
• Here’s a quick punch list of the pros and cons of flexible budgets.
• Though the flex budget is a good tool, it can be difficult to formulate and administer.
• When people know there’s not an iron-clad expectation to stay within a static line item, there’s temptation to constantly ask for more.

The figures used in this form of cost and expenses budget are made adaptable to any given set of operating conditions within any month of the fiscal year. The figures range from the lowest to the highest probable percentages of operating performance.