Under this method, a budget is prepared for the expected normal level of activity and variable cost per unit of activity is ascertained. Flexible budgets are most appropriate for businesses that operate with an increased variable cost structure, where costs are primarily attached to activity levels. With flexible budgets, managers are constantly updating their projections and cost controls with current information. The most significant advantage of flexible budgets over static ones is the ability to adapt to changes in the real world. Nothing ever stays the same, and management has the responsibility to respond to unanticipated adverse conditions and to take advantage of unexpected opportunities. Variable expenses in flexible budgets are defined as percentages of sales.

Budgeting is an important part of business finances as well as personal finances. While the general concept of budgeting may be the same, it can be used for many different purposes. Because of this, there are several different types of budgeting systems that can be used. Fixed https://www.bookstime.com/ costs do not change each month, i.e., they remain the same. The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month. A flexible budget is a budget or financial plan that varies according to the company’s needs.

What Does Flexible Budget Mean?

That’s because flexible budgets require continual upkeep and maintenance — you’re constantly having to keep an eye out for fluctuations and then execute those changes as quickly as you can. While this isn’t a reason to avoid flexible budgeting altogether, it’s good to keep in mind as you consider how and when to implement this kind of budgeting strategy. If your company regularly conducts a flux analysis, syncing this process with your flexible budget creation can help save time. A flexible budget is kind of a hybrid approach to financial planning. It begins with a static framework built from the costs that are not anticipated to change throughout the year.

The actual revenue the widget company is taking in has doubled—but the production costs would also go up. The flexible budget for the quarter would reflect both these things. Creating a flexible budget begins with assigning all static costs a fixed monthly value, and then determining the percentage of revenue to assign to your variable costs.

Flexible Budget: Importance and Methods of Preparation

Then, upload the final flexible budget for the completed period into your accounting system so you can compare it with actual expenses through a variance analysis(opens in new tab). A flexible budget that evolves throughout the year as key assumptions, like sales and production levels, change and you need to respond to market trends or other fluctuations that impact financial performance. Flexible budgets are especially beneficial in volatile periods or unpredictable markets. There is a place for static budgets when costs are largely fixed — think rent, website, insurance. However, the benefits of rigidity fade when no room is left for emergencies, opportunities and strategic shifts. Small companies and startups may even miss out on new sources of income.

Businesses of all sizes are realizing they need to be nimbler and more flexible in their planning, hence the increased adoption of rolling forecasts. It is helpful in assessing the performance of departmental heads because their performance can be judged in relation to the level of activity attained by the organisation. Flexible budget recognises concept of variability and provides logical comparison of expenditure with actual expenditure as a means of control. Flexible budget provides a logical comparison of budgeted allowances with the actual cost i.e., a comparison with like basis. Where the level of activity during the year varies from period to period, either due to the seasonal nature of the industry or due to variation in demand.

Content: Flexible Budget

A favorable flexible budget variance would mean that the projected costs are below the budget, which is good as long as the correct scenario is used for the actual volume. An unfavorable flexible budget then means that the costs are above the budget, which impacts the profit of the business. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures.

Growth rarely happens in exactly the way your original business plan described. A long-term budget can be defined as a budget which is prepared for periods longer than a year. These budgets help in business forecasting and forward https://www.bookstime.com/articles/flexible-budget planning. Capital Expenditure Budget and Research and Development Budget are examples of long-term budgets. Where the undertaking is suffering from shortage of a factor of production such as materials, labour, plant capacity etc.