For example, if you build your static budget based on 1, units, but only produce or sell units, the static budget is off. The flexible budget allows you to account for that change, accurately reflecting the situation for units. It works the other way, too — if you end up needing to produce 1, units, you can use the flexible budget to scale up your total cost.
In other words, you can take a favorable variance in one category of your budget, and apply it to another flexible budget variance in hopes of producing more profit. The key lies in keeping a disciplined process when justifying budget increases. You have to be honest with yourself. So which type of budget should you use and when?
Most businesses should take advantage of both kinds of budget. The only exception to this approach should be during business cycles when your company manages to strictly adhere to the original static budget. In this situation, the information within the static and flexible budget would be the same. Flexible budgets are most appropriate for businesses that operate with an increased variable cost structure, where costs are primarily attached to activity levels.
A flexible budget makes it easier for businesses to see more variances. Thus although it is effective for variance analysis, it is not realistic as change is the only constant in economies. A static budget is used by an organization that deals with goods with fixed prices and transactions, government and educational organisations etc.
A flexible budget is the kind of budget that prepared in a way that allows it to changes according to changes in the assumptions made during its preparation. This is a sophisticated budget to, prepare as one has to consider all the changes and variations that can take place in the future reporting period and makes a series of budgets to meet specific changes.
One has to have intricate knowledge of which costs are fixed and which are not and prior knowledge of the effect of changes of assumptions. It works with the as sales on that changes are bound to happen and hence are designed as flexible. For example, A business in the fashion industry has a flexible budget as fashion styles change frequently.
This budgeting method is totally different from a fixed budget as here the budgeted costs are varying with the actual input and output levels of the business. It is more important for any organization to analyse the variances identified by flexible budgets due to the fact that flexible budget determines the standard cost of operating for actual output levels.
A company needs to draw both fixed and flexible budget. Both the budgets are necessary and serves different purposes. Fixed budget provides a roadmap based on which company operates for the specified period whereas flexible budget provides the details of standard cost of operations at varied capacity utilization level.
Major differences between the fixed budget and flexible budgets are as follows-. Fixed and flexible budget both are important for any organization.
Both these budgets serve different needs and provides guidance for further action. While comparing a fixed budget with the flexible budget we get to know which one is more relevant and of use. Although a fixed budget is easy to prepare, serves as an acting guideline but there are no chances of any alterations. On the other hand, a flexible budget is considered elastic and adjusts with each ups and downs of business operations.
Therefore, it is advisable to use flexible budget irrespective of the size of your business along with fixed budget.
Comparisons are realistic as the changed plan figures are placed against actual ones. It is difficult o forecast accurately the results in it. Flexible budget clearly shows the impact of various expenses on the operational aspects of the business.
Only one budget at a fixed level of activity is prepared due to an unrealistic expectation on the part of the management Series of budgets are prepared at different level of activities.
0コメント