Flexible Budget

 

Flexible Budget is also called Variable or Sliding Scale budget, “takes both the fixed and manufacturing costs into account. Flexible budget is the opposite of static budget showing the expected cost at a single level of activity. According to ICMA, England defined Flexible Budget is a budget which is designed to change in accordance with the level of activity actually attained.”

 

According to the principles that guide the preparation of the flexible budget a series of fixed budgets are drawn for different levels of activity. A flexible budget often shows the budgeted expenses against each item of cost corresponding to the different levels of activity. This budget has come into use for solving the problems caused by the application of the fixed budget.

 

Advantages of Flexible Budget

 

(1) In flexible budget, all possible volume of output or level of activity can be covered.

(2) Overhead costs are analyzed into fixed variable and semi-variable costs.

(3) Expenditure can be forecasted at different levels of activity.

(4) It facilitates at all times related factor can be compared. which are essential for intelligent decision making.

(5) A flexible budget can be prepared with standard costing or without standard costing depending upon What the Company opts for.

(6) Flexible budget facilitates ascertainment of costs at different levels of activity, price fixation, placing tenders and Quotations.

(7) It helps in assessing the performance of all departmental heads as the same can be judged by terms of the level of activity attained by the business.

 

Distinction between Fixed Budget and Flexible Budget

Fixed Budget Flexible Budget
It does not change with the volume of activity. It can be recast on the basis of volume of cost.

 

All costs are related to one level of activity only. Costs are analyzed by behavior and variable costs

are allowed as per activity attained.

If budget and actual activity levels vary. cost Flexible budgeting helps in fixation of selling price

ascertainment does not provide a correct picture. at different levels of activity.

Ascertainment of costs is not possible in fixed cost. Costs can be easily ascertained at different levels of

activity.

It has a limited application for cost control. It has more application and can be used as a tool

for effective cost control.

It is rigid budget and drawn on the assumption that It is designed to change according to changed

conditions would remain constant. conditions.

Comparison of actual and budgeted performance Comparisons are realistic according to the change

cannot be done correctly because the volume of in the level of activity. production differs.

Costs are not classified according to their variability. Costs are classified according to the nature of their

i.e .• fixed. variable and semi-variable. variability.

 

Method of Preparing Flexible Budget

 

The following methods are used in preparing a flexible budget:

(1) Multi-Activity Method.

(2) Ratio Method.

(3) Charting Method.

 

(1) Multi-Activity Method: This method involves preparing a budget in response to different level of activity. The different level of activity or capacity levels are shown in Horizontal Columns, and the budgeted figures against such levels are placed in the Vertical Columns. The expenses involved in production as per budget are grouped as fixed, variable and semi variable.

 

(2) Ratio Method: According to this method, the budget is prepared first showing the expected normal level of activity and the estimated variable cost per unit at the side expected level of activity in addition to the fixed cost as estimated. Therefore, the expenses as per budget, allowed for a particular level of activity attained, will be calculated on the basis of the following formula : Budgeted fixed cost + (Variable cost per unit of activity x Actual unit of activity)

 

(3) Charting Method: Under this method total expenses required for any level of activity, are estimated having classified into three categories, viz., Variable. Semi Variable and Fixed. These figures are plotted on a graph. The expenses are plotted on the Y-axis and the level of activity are plotted on X-axis. The graph will thus, help in ascertaining the quantum of budgeted expenses corresponding to the level of activity attained with the help of this chart.

 

 

 

 

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