Budget which is changed according to level of activities is known flexible budgeting.
It gives different budgeted cost for different level of activities.
A flexible budget is prepared after making difference classification of all the expenses.
They are fixed cost, variable cost and semi variable cost.
Define of flexible budget
According to The Chartered Institute of Management Accountants, London, “A flexible budget is a budget, which is designed to change in accordance with level of activity actually attained.”
According to Institute of Cost and Works Accountants, India, “A budget which is recognized difference between fixed cost and variable cost, designed to change in relation to each level of activities attained.”
The main importance of flexible budget are given below:
Flexible budget covers a range of activities.
It is easy to change according to variance of the production and sales level.
It helps to measurement and evolution.
Flexible budget takes into consideration the change in the volume of activities.
It replaces a static/fixed budget for control.
It is helpful in price fixation and sending quotation.
Flexible budget can be changed quickly when it is required to change.
It helps to evolution the work or performance efficiency and to control cost.
Generally flexible budget has following advantage:
Accurate budget
Expenses can be divided according to nature.
Budget can be changed according to actual work.
Therefore, it is near to reality.
Performance evolution
Works are properly evaluated under flexible budget.
Actual work is compared with budgeted work.
If there is any change, it is changed.
It helps to management to take proper decision.
Co-ordination
Flexible budget coordinates among all the departments.
Goods are produced on the basis of sales.
Materials and labour are managed according to production.
To achieve the aim of budget, coordination is necessary.
Cost control
Flexible budget is a cost control tool. It controls variance of budget aim and actual work.
######
Click on the link for YouTube videos |
|
Accounting Equation |
|
Journal Entries in Nepali |
|
Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cashbook |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
|
|
Click on the link for YouTube videos chapter wise |
|
Financial Accounting and Analysis (All videos) |
|
Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
######
Fixed budget is drawn for one level of activity and one set of condition.
In other words, it does not change according to output.
It does not change expenditure according to level of activity.
A fixed budget will be useful only when the actual level of activity match to budgeted level of activity.
A master budget fix a level of activity (assume 10,000 units) but in practice, level of activity will be change according to demand and supply, price, shortage of materials etc.
It does not use actual concept of budget because it does not make any distinction or difference between fixed cost, semi-variable cost and variable cost.
It does not provide meaningful basis for comparison and control.
It is also not helpful to fixation selling price.
Example
A company pays a 5% sales commission on all of its sales.
If the company prepares a fixed budget and it is projecting (budgeted and estimated) sales of $10,00,000,
Here, commission is $10,00,000@5% = $50,000
If the actual sales are only $900,000 but the commissions will remain unchanged at the fixed of $50,000.
If the actual sales are $11,00,000, the budget for sales commissions will also be $50,000.
Following are the main limitation of static or fixed budget:
It is based on single level of activity, so it cannot use for cost control.
It cannot analyze between expected and actual level of activity or output.
It does not make difference between fixed cost, semi-variable cost and variable cost.
It does not fix selling price.
It is suitable for job order production.
Click on the photo for FREE eBooks
Fixed budget
A fixed budget is also known as a static budget.
A fixed budget is a budget that does not change or flex for increases or decreases in volume.
Here, volume may be sales, units produced, or some other activity.
Flexible budget
Budget which is changed according to level of activities is known flexible budgeting.
A flexible budget is prepared after making difference classification of all the expenses.
They are fixed cost, variable cost and semi variable cost.
Differences between Fixed Budget and Flexible Budget
Base |
Fixed budget |
Flexible budget |
Nature |
It is fixed or inflexible in nature; it does not change according to output or level of activity. |
It is flexible in nature; it changes according to output or level of activity. |
Classification of cost |
Costs are not classified as variable cost, semi-variable cost and fixed cost. |
Costs are classified as variable cost, semi–variable cost and fixed cost. |
Forecast |
It does not show accurate result in forecast. |
It shows clearly the impact of forecast on the operational aspect or feature. |
Condition |
It is assumed that conditions will remain static. |
It is designed to change according to condition. |
Tool for cost control |
It has limited application and for cost control. |
It has more applications and can be used for effective cost control. |
Fixation of price |
If budgeted and actual costs are different, fixation of price becomes difficult. |
It is flexible. It helps to fixation price for tender. |
Valentine Day, 14th February 2022
EP Online Study
Thank you for investing your time.
Please comment on the article and share this post on your social media platform.
Jay Google, Jay YouTube, Jay Social Media
जय गूगल. जय युट्युब, जय सोशल मीडिया
Comment box closed