Difference between Static and Flexible Budgets:
Criteria | Static Budget | Flexible Budget |
---|---|---|
NATURE |
It does not change with the actual volume of the output achieved. |
It is designed to change appropriately with the level of activity attained. |
SCOPE |
It cannot ascertain costs correctly in case of any change in circumstances. |
It can easily ascertain the costs in different levels of activities. |
DETERMINATION OF COSTS | It is prepared under the assumption that all conditions will remain unaltered. | It is prepared at different levels of activities considering the possible changes in the operational aspects of a business. |
ASSUMPTIONS | It has a limited application and is ineffective as a tool for cost control. | It has a wide application and is an effective tool for cost control. |
PRE-REQUISITES | It is prepared without classifying the costs according to their variable nature. | It is prepared by classifying the costs according to their variable nature. |
Detailed Example:
Following is the static budget, flexible budget and actual results of X Co. Ltd for the month of October, 2018 :
Particulars | Actual | Static | Flexible |
---|---|---|---|
Units | 40,000 | 30,000 | 40,000 |
Revenue | 236,000 | 180,000 | 240,000 |
VARIABLE COSTS | |||
Material | 76,000 | 60,000 | 80,000 |
Labour | 63,200 | 45,000 | 60,000 |
Factory Overhead | 34,000 | 24,000 | 32,000 |
CONTRIBUTION | 62,800 | 51,000 | 68,000 |
Fixed Costs | |||
Factory Overhead | 12,880 | 12,000 | 12,000 |
Office Expenses | 22,000 | 20,000 | 20,000 |
OPERATING INCOME | 27,920 | 19,000 | 36,000 |
The management is pleased with the income being higher than budgeted. However the significant increase in units sold renders the comparison of actual vs static unfair. Hence, we have to use a flexible budget.
The flexible budget on the other hand depicts an unfavourable variance of operating income of (36,000 - 27,920 = 8,080) which helps the company to identify the loop-holes and control costs to achieve the desired profits.
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