6 Advantages And Disadvantages Of Flexible Budgeting
In the simplest terms, a flexible budget can be described as an end of period actual accounting of expenses on which to form a comparison with the original static budget. Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets.
When actual variable cost per unit equals standard variable cost per unit, the difference between actual and budgeted contribution margin is explained by a combination of which two variances? The sales-volume variance and the fixed-overhead volume variance. The sales-volume variance and the fixed-overhead budget variance. The sales-price variance and the fixed-overhead volume variance. The sales-price variance and sales-volume variance. The sales-price variance and fixed-overhead budget variance.
A variance may be favorable or unfavorable. On an income statement budget report, think of how the variance affects net income, and you will know if it is a favorable or unfavorable variance. If the actual results cause retained earnings net income to be higher than budgeted net income , the variance is favorable. If actual net income is lower than planned (lower revenues than planned and/or higher costs than planned), the variance is unfavorable.
Static budgets are geared to one level of activity. They work well for evaluating performance when the planned level of activity is the same as the actual level of activity, or when the budget report is prepared for fixed costs. However, if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled. stoneMason May 29, 2014 @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. If you know what your fixed and variable costs are and if you know exactly how your expenses are going to change in the near future, then a flexible budget will work for you.
What Are The Pros And Cons Of A Flexible Budget?
A flexible budget is usually designed to predict effects of changes in volume and how that affects revenues and expenses. https://online-accounting.net/ In order to accurately predict the changes in costs, management has to identify thefixed costsand thevariable costs.
Therefore, many Industries and companies can’t use this budget despite its enormous advantages.
It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs. A a flexible budget is appropriate for flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity.
Flexible Budget Is Appropriate For
In the case of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales. Enter actual activity measures into the model after an accounting period has been completed. This updates the variable costs in the flexible budget. Flexible means easily adjustable, and Budget refers to an anticipated plan made for the financial activities of the entity. Therefore, the flexible budget is a financial plan created for different activity levels. It can be freely adjusted or re-casted on the basis of output produced. It is logical and practical because the cost can be easily determined at various activity levels.
Choice “A” is correct. A flexible budget is a budget prepared at different levels of operating activity. It is appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since fixed costs What is bookkeeping do not vary with changes in the level of activity.Choice “c” is incorrect. Both of these budgets have variable cost components, so flexible budgets would be meaningful at different levels of activity.Choice “d” is incorrect.
Read more about the author. This budget requires skilled workers to work on it. The availability of skilled workers becomes a challenge for the industry.
Static and flexible budgets are two separate yet interconnected parts of a solid business accounting regimen. A flexible budget can sometimes account for an entire company budget; however, it is best used as part of a larger overall budget in a subsection role, such as a variable expense account.
A typical budget is usually formatted with five columns. The first column lists the sales and expense categories for the company. The second column lists the variable costs as a percentage or unit rate and the total fixed costs. The next three columns list different levels of output and the changes in variable costs based on the increased or decreased sales.
The master budget is established before the period begins for planning purposes, and the flexible budget is established after the period ends for control and evaluation purposes. Production managers are evaluated using the flexible budget because the usage of direct materials, direct labor, and manufacturing overhead will depend on the actual number of units produced.
Using a flexible budget for the first time may therefore cause some issues with providing the right amount of resources to meet current needs. A flexible budget allows someone to try brand name items. Choosing the appropriate types of budgets for businesses is also dependent on how great the level of variance actually is in terms of increased or decreased profits. This variance is directly affected by the nature of expenses as well, which can be fixed or fluctuating in nature.
Budgets are helpful but they can also become oppressive if an individual consistently cannot stay within the limits or passes on opportunities in order to save money. By designing a budget with flexibility in mind, you won’t find yourself stressed out at the end of every month or telling your friends you can’t join them all the time. Just be sure not to use it an excuse to lose the boundaries entirely.
Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.
Atlanta Enterprises incurred $828,000 of fixed overhead during the period. During that same period, the company applied $845,000 of fixed overhead to a flexible budget is appropriate for production and reported an unfavorable budget variance of $41,000. How much was Atlanta’s budgeted fixed overhead? Not enough information to judge.
Module 10: Cost Variance
The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%). These are added to the fixed costs of $12,500 to get the flexible budget amount of $24,750. Actual net income is unfavorable compared to the budget. What is not known from looking at it is why the variances occurred. For example, were more units sold? Was the selling price different than expected? Were costs higher?
Thus, a flexible budget is particularly appropriate for control of direct labor and direct materials , but is not necessary for control of fixed factory overhead. By definition, overhead costs do not change as activity levels change. A significant retained earnings downfall to the flexible budget, however, is that it cannot be created until some sales figures have first been generated. This means that a flexible budget is initially based on the performance levels of a past quarter’s static budget.
A flexible budget is a revised master budget that represents expected costs given actual sales. Costs in the flexible budget are compared to actual costs to evaluate performance. Flexible budgets calculate, for example, different levels of expenditure for variable costs. These levels vary depending on the changes in revenue. Subsequently, the budget varies, depending on activity levels that the company experiences. A budget report is prepared to show how actual results compare to the budgeted numbers. It has columns for the actual and budgeted amounts and the differences, or variances, between these amounts.
So higher revenues cause a favorable variance, while higher costs and expenses cause an unfavorable variance. A flexible budget can allow for impulsive purchases while at the store. Whether a flexible budget or static budget is used by a business is largely determined by the nature of the business cycle and how seasonal it may be.
- Static and flexible budgets are two separate yet interconnected parts of a solid business accounting regimen.
- It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs.
- can be used to compare actual and budgeted costs at various levels of activity.
- A flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity.
- A flexible budget can sometimes account for an entire company budget; however, it is best used as part of a larger overall budget in a subsection role, such as a variable expense account.
- is preferred over a static budget in the evaluation of performance.
The fixed-overhead volume variance. The total fixed-overhead variance.
Static Budget Vs Flexible Budget
Cost Ascertainment is also not possible in case of fixed budget if the actual and budgeted levels of activity vary and the same can be easily determined in the case of a flexible budget. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. Selling Expenses. The original budget for selling expenses included variable and fixed expenses. To determine the flexible budget amount, the two variable costs need to be updated.
Or was it all of the above? These are the kinds of questions management needs answers to.