Question

Explain what a flexible budget is and how it differs from a master budget.

In addition, you must explain why it is important to evaluate managers using activity variances and revenue and spending variances rather than just comparing actual results to the static planning budget.

Answer 1

Solution. Difference between a flexible budget and a master budget:

A flexible budget is one as the name implies changes or adjusts with change in output volume to facilitate in comparison of performance with standard level recorded initially as both data on fixed expenses and variable expenses activity levels can be measured. Whereas, Master Budget consist of operational budget and financial budget. It encompasses organization's individual departmental budget on sales, purchases, selling and administrative budget, etcetera and records net outcome during an accounting period.

In today's competitive economic business market, managers need to record, analyze and interpret activity variances and revenue and spending variances along with comparison of actual results to the static planning budget as to fetch information on favorable and unfavorable variance reports on different levels of departmental activity in order to easily determine reasons behind the same and bridge the gap thereby obtained(if any) to gain competitive advantage of opportunities and efficiency over others. An organization in order to smoothly run and sustain need its manager to bring harmony in different processes and performance elements in order to reduce chances of adverse situations in future.