Characteristics of Flexible Budget

Characteristics of Flexible Budget

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.

The crucial 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 of activity.

Flexible budget facilitates efficiency measurement and evaluation.

Flexible budget replaces a static budget with regard to control.


  

Steps To Be Adopted For Preparing A Flexible Budget:

To find out the cost behavior i.e. fixed, variable or semi-variable.

To choose the range of routines for which the budget is to be prepared.

To organize flexible budget each and every selected levels.

To choose the activity level for planning the budget.

Flexible Budget Example

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.

Reporting

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.

Modeling

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 creation.

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.

Flexible Budget Formula

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.

Produce 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.