The flexible budget allows estimates for expected expenses for costs that may fluctuate, such as utilities. Using this budgeting process is more effective since it provides a realistic outlook on the projected budget. The following flexible budget reveals the expected aggregate expense levels. In reality, supporting flexible budget documents would resemble the comprehensive budget documents portrayed in the prior chapter. Such comprehensive documents would provide the information necessary to manage the smallest of operating details that must be adjusted as production volumes fluctuate.
It perhaps goes without saying that computers are extremely helpful in preparing budget information that is easily flexed for changes in volume. Indeed, even the preparation of the very simple illustrative information for Mooster’s Dairy was aided by an electronic spreadsheet. Businesses save millions of dollars in accounting time by relying on computers to aid budget preparation. This budget can be re-casted on the basis of the activity levels. In case of a business which carries their entire work with the help of laborers.
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,
Flexible budgeting is an important tool for most small businesses. Learn how it can help your business respond to the ups and downs of the marketplace. It may be tricky to analyze the variances of cost, as the nature of all the expenses may not be the same. Prediction can be highly volatile as it depends upon factors of production which are beyond managerial controls. The preparation of a flexible budget requires skilled workers.
The level of activity depends upon the availability of such a factor of production. It helps establish the variability of cost factors at different levels of activity. The market share variance is favorable indicating that the company increased its percentage of the market.
Static versus Flexible Budgets
This is because the fixed expenses don’t change irrespective of the activity level and the semi-variable expenses do change but not in proportion to the activity level. Only the purely variable expenses vary proportionately with the activity level.
What is budget period?
The intervals of time into which a period of assistance (project period) is divided for budgetary and funding purposes. Budget periods are usually 12 months long but may be shorter or longer, if appropriate. Sometimes referred to as the Budget Year.
The flexible budget at first appears to be an excellent way to resolve many of the difficulties inherent in a static budget. However, there are also a number of serious issues with it, which we address below. Selected information may also be shared with a business’s suppliers and customers via electronic data interchange. The net result is that the supply chain is immediately adjusted to https://wave-accounting.net/ match raw material orders to actual production needs, thereby eliminating billions of dollars of raw material waste and scrap. Suppose the budget was set up with the expectation that sales would be $200,000 per month and labor cost was budgeted at $50,000 per month, or 25 percent of sales. It can help in sales, costs, and profit calculation at different levels of operating capacity.
Flexible Budget Reports
Flexible budgets have distinct advantages over static budgets. After you get used to flexible budgets, they will become one of your favorite management tools. A flexible budgeting approach is more realistic and practical than a static budget. It provides flexible targets for management with achievable 7 4 Prepare Flexible Budgets results. You should perform a flexible budgeting variance analysis for each activity to gain valuable information on discrepancies in planning and operations. Budgeting is how a company plans for future production cycles. The initial estimate or static budget is a necessary part of planning.
Over time, though, your actual production, sales, and revenue will change. These changes can be due to variations such as changing inventory costs, supply chain concerns, and market conditions. You would then take your static, or master, budget and adjust the numbers based on your actual revenue. In brief, a flexible budget is a budget that distinguishes the behavior of fixed and variable cost that changes. And changes that happen with the level of activity attained, or change in the revenue or other variable factors.