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Flexible Budget | Fixed Budget | Flexible Budget vs Fixed Budget

Arjun EP

Published on: February 14, 2022

Flexible Budget

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.”

Importance of Flexible Budget | Characters of Flexible Budget

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.

Advantages of Flexible Budget

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.

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Fixed Budget

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.

Limitations of Fixed Budget | Limitations of Static Budget

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.

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Differences between Fixed Budget and Flexible Budget

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.