What Are the Advantages of Using a Flexible Budget vs. a Static Budget?

While it’s true that a static budget is a better rule of thumb, there are advantages to using a flexible budget as well. Flexible budgets are ideal for people who want to adjust their budgets throughout the year based on seasonal fluctuations. They’re also great for people who want to save money for a vacation or a major purchase.

It is important to consider a business’s budget when making decisions about the type of business to start. But if you’re like most people, you’re just not comfortable with the idea of a flexible budget. What’s flexible about it, exactly? If you use a flexible budget, you can change your expenses and income at any given time. A static budget, on the other hand, is more of a set amount that you can’t change.

General ledger accounts What are the advantages of a flexible budget over a static budget?

20.07.2020
Accounting Adam Hill

What is a flexible budget?

A document containing the financial ratios calculated on the basis of this information is attached to the budget. These measures provide insight into the extent to which the main budget has been realistically generated on the basis of actual past performance.

This type of budget shows the company what the static budget should have been, based on actual performance figures for the budget period. If the static budget z. B. covers the production of 1,000 units, but only 600 units were produced, the flexible budget takes into account only 600 units. The flexible budget shows the budget items from the static budget – such as expenses and planned sales – and the actual results.

These two budgets are considered important milestones in the budgetary control process. They have a number of uses, such as cost control and performance measurement.

The overall budget is a financial forecast of all elements of the business for the financial year, which is obtained by combining many functional budgets, for example, the sales budget, the purchasing budget, etc. These various budgets are interlinked and together provide accounting estimates for the next financial period. The individual departments draw up separate budgets and the net result is transferred to the general budget. With a flexible budget, you can transfer money to cover an unexpected emergency or car repair.

When you transfer money, you reduce the budgeted amount in the category you borrowed the money from. If the budget does not allow for flexibility, it can be difficult to meet financial obligations in an emergency. Create flexibility by setting aside a category each month for savings or other expenses. A flexible budget allows you to plan your spending based on your income. If you don’t make much money, save only what you need.

The difference between a master budget and a flexible budget depends mainly on the purpose for which they are drawn up. The budget created by aggregating all sub-budgets is called the general budget, while the budget created for different levels of activity is called the flexible budget. When budgets are used effectively, they provide a wider range of benefits, including revenue growth and effective cost control. Flexible budgets are particularly useful for organizations with variable cost structures. A fixed budget is usually based on unrealistic assumptions and is therefore not applicable to business tasks, whereas a flexible budget is more practical.

Why use a flexible budget?

In its simplest form, a flexible budget uses a percentage of income for certain expenses instead of the usual fixed amounts. This allows for an infinite range of changes in budgetary expenditures that are directly related to the actual revenue being accrued.

The first option does not help in making a comparison when the actual and budgeted results differ, while the second option helps in assessing performance by comparing the actual results with the budgeted objectives. With a fixed budget it is not possible to determine the costs, even if the actual and planned activity differ. In the case of a flexible budget, this can be easily determined. In the original budget, production of 100,000 units resulted in a total variable cost of $130,000. If the total cost of each category is divided by the budgeted level of production, the variable unit costs are $0.50 for indirect materials, $0.40 for indirect labor, and $0.40 for utilities. The main budget is the sum of all subordinate budgets prepared by the various functional areas of the company, and also includes estimated financial statements, cash flow projections and a financing plan.

It should not be confused with a contingency budget, which includes amounts for expenses that are difficult to plan or predict. A flexible budget is a special type of budget that contains fixed and variable amounts based on a formula.

He finds this change very useful as it allows him to adjust his budget expenditure to new orders. Instead of an annual budget, King’s Apparel is moving to a monthly budget. In addition, each output is divided into fixed, variable and semi-variable. This allows him to fine tune the activity level. A flexible budget is a budget that varies according to the size or activity of the business.

• These two budgets are considered important milestones in the budgetary control process.
• This type of budget shows the company what the static budget should have been, based on actual performance figures for the budget period.

The general budget is usually submitted on a monthly or quarterly basis and usually covers the entire financial year of the company. Staffing changes needed to meet the budget can also be discussed.

The cost elements depend on the type of business, but generally include individual overhead costs such as materials and labor. A favorable variance benefits the company by increasing overall revenues, while an unfavorable variance represents unexpected expenses or cost increases that negatively affect profit levels. Negative deviations are areas that the company needs to work on to improve profits and reduce overhead. If z. B. A plant has a larger than normal order for the next month, the expenditure budget for that month can be based on the estimated number of units to be produced. Management can calculate that there is a $3 variable cost for each unit produced, so increasing production by 10,000 units would increase that month’s budget by $30,000.

By including these changes in the budget, the organization has a tool to compare actual and planned performance at many levels of activity. The flexible budget shows the planned figures, the reported actual figures and the differences between these figures for each item of the static budget.

Breakdown of fixed and variable costs

If you earn more after this threshold, put a certain amount in savings. For example, if you can meet your basic needs with $1,500, after you earn that amount for the month, set aside the first $300 as savings and spend the rest as you see fit. Or set a certain percentage, for example. B. 50% of money earned above the threshold goes to savings and 50% to leisure. A flexible budget allows you to move money from one category to another and set new spending limits as needed. If your water or electricity bill is significantly higher in the winter, you can adjust your budget by transferring money from another category.

Flexible budget definition

A flexible budget is a budget that adapts or changes according to the level of activity. Unlike a static budget, which is prepared for one level of activity, a flexible budget is more complex and useful. Here, revenues and expenses, regardless of budgeted performance, are compared to actual performance using adjusted results.

Deviation information, such as the difference between estimated and actual sales, B. estimated and actual operating expenses, helps a company improve efficiency and identify problem areas. If z. For example, if a static budget estimates the material cost at $45 per item and a flexible budget estimates the material cost at $65 per item, the difference may indicate an ordering or material selection problem. The deviation from the flexible budget is the difference between the flexible budget line and the corresponding information in the actual company accounts.

However, this approach does not take into account the evolution of other costs that do not vary with small fluctuations in sales. Therefore, the more complex design will include changes in many incremental costs with some larger changes in revenue to account for incremental costs.

What is a flexible budget?

Example of a flexible budget ABC Company has a budget of $10 million in sales and $4 million in production costs. Of the budgeted $4 million sales expense, $1 million is fixed and $3 million varies with sales. The variable part of the manufacturing costs is therefore 30% of sales.

Flexible budgets are best suited to organizations that operate with a highly variable cost structure, where costs depend primarily on the level of activity. On the other hand, flexible budgets require time and more planning due to changing activity levels. In business, a flexible budget is one that you adjust as expenses and income change. You set your budget at the beginning of the financial year and look at how much money your business has, needs and expects to make.

With a flexible budget, a company can have more variety than with a static budget. The flexible budget information is based on actual results and allows the company to verify the accuracy of the static budget and compare results. The company compares the actual costs and benefits of the flexible budget items with the static budget estimates.

In the months when your income is higher, you put money aside for the months when your income is lower again. For example, set a spending limit that covers your basic needs. B. Housing, food, utilities, gas.

Fixed costs, savings costs and variable costs are the three categories that make up your budget, and they are essential to learning how to manage your money well. If you have decided to live on a budget, you need to know how to put your plan into action. A flexible budget is a budget with different levels of income and expenses based on actual sales volume. Master budgets are generally presented on a monthly or quarterly basis for the entire fiscal year. Together with the main budget, other documents may be submitted in support of the decisions.

Flexible budgets are not as rigid as static budgets and are therefore a suitable tool for evaluating the performance of managers. Once volume is set, managers may later discover that demand and cost projections have changed significantly from what was anticipated and that they were unable to meet budget.{“@context”:”https://schema.org”,”@type”:”FAQPage”,”mainEntity”:[{“@type”:”Question”,”name”:”What is difference between static budget and flexible budget?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” A static budget is a budget that is set in stone. It is set at the beginning of the fiscal year and cannot be changed. A flexible budget is a budget that is set at the beginning of the fiscal year, but can be changed throughout the year.”}},{“@type”:”Question”,”name”:”What is the flexible budget and its advantages?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” The flexible budget is a budget that is adjusted to the changing needs of the household. It is a budget that is used when there are unexpected changes in the household.”}},{“@type”:”Question”,”name”:”What is the major distinction between a static budget and a flexible budget what are the costs versus benefits when a manufacturing business implements a flexible budget give an example of a static budget producing incorrect differences when budget is compared to actual amounts?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” A static budget is a plan that is not flexible and does not change with changes in the business. A flexible budget is a plan that changes with changes in the business. A good example of a static budget is a budget for a manufacturing business that does not account for the cost of raw materials. A flexible budget would account for the cost of raw materials and would be adjusted for changes in the business.”}}]}

Frequently Asked Questions

What is difference between static budget and flexible budget?

A static budget is a budget that is set in stone. It is set at the beginning of the fiscal year and cannot be changed. A flexible budget is a budget that is set at the beginning of the fiscal year, but can be changed throughout the year.

What is the flexible budget and its advantages?

The flexible budget is a budget that is adjusted to the changing needs of the household. It is a budget that is used when there are unexpected changes in the household.

What is the major distinction between a static budget and a flexible budget what are the costs versus benefits when a manufacturing business implements a flexible budget give an example of a static budget producing incorrect differences when budget is compared to actual amounts?

A static budget is a plan that is not flexible and does not change with changes in the business. A flexible budget is a plan that changes with changes in the business. A good example of a static budget is a budget for a manufacturing business that does not account for the cost of raw materials. A flexible budget would account for the cost of raw materials and would be adjusted for changes in the business.