A budget may be described as a quantitative expression of a
company plan for any specified long term period, usually per year. It is merely
a financial forecast for a potential period. A budget is a temporary financial
plan. It is an action plan to help managers in reaching the goals of a firm.
characteristics of flexible budget can be pointed as follows:
Flexible budget is simple to change based on variations of
production and sales levels.
Flexible budget addresses a range of activities
It takes into consideration the modifications in the volume
Flexible budget facilitates efficiency measurement and
Flexible budget replaces a static budget with regard to
Steps To Be Adopted
For Preparing A Flexible Budget:
To find out the cost behavior i.e. fixed, variable or
To choose the range of routines for which the budget is to
To organize flexible budget each and every selected levels.
To choose the activity level for planning the budget.
A budget does not just figure out how a business should
invest its money. The budget additionally helps an organization evaluate its
efficiency with time. All budgets possess flexibility, as unpredictable
modifications can impact how a business should allocate its money. A flexible
budget, also known as a flex budget, is very useful because of the dynamic
adjustments that most companies experience throughout an accounting period.
Organizations prepare flexible budgets at the finish of an
accounting time period to compare the way they actually invested their money
with the way they had planned to spend their cash. The flexible budgets show
how they truly invested their funds.
Flexible budgets also enable companies to model the way they
might allocate their money in lieu of particular adjustments. A company can
prepare a range of flexible budgets that every reflect a various scenario.
Long Term Budgeting
A company can make a flexible budget to exhibit what it
earned and spent and its overall equity (profits returned to the stockholders
and company), over a long period. For example, the company might produce a
flexible budget reflecting its efficiency over the past 5 years or since its
Short Term Budgeting
A store might generate a flexible budget to reflect its
short-term successes or shortcomings, including the previous week's sales. For
example, if a store earned $52,000 in per week when the static budget predicted
$45,000, the manager might prepare a flexible budget to find out what factors
performed a role.
A flexible budget figures different expenditure levels with
regard to variable costs, based upon changes in the sum of actual revenue or
other activity measures. You enter the actual revenues or other activity
measures to the flexible budget when an accounting period has been finished and
it produces a budget that is certain to the inputs.
To build up a flexible budget formula, managers figure out
revenue and cost behavior (within the relevant range) with regards to cost
drivers. Remember that the static budget is only the flexible budget for an
individual assumed level of activity.
Then you compare the budget vs . actual information for
manage purposes. The measures needed to construct a flexible budget are:
Figure out the extent
to which all variable costs modify as activity measures change.
Determine all fixed
costs and segregate them within the budget model.
the budget model, in which fixed costs are “hard coded” to the model, and
variable costs are explained as a percentage of the related activity measures
or as a cost for each unit of activity measure.