Question

• What are the costs versus benefits when a manufacturing and retail business implements a flexible budget for the first 3 quarters of the fiscal year? What is the major distinction between a static budget and a flexible budget? Illustrate the differences using a real-world example and provide an academic reference to support your response.

Answer 1

Benefits of Flexible Budget

1. Help react more quickly to adverse conditions. For example, if only 75% of the budgeted sales have been actually met, the simultaneous labor cost should also be restricted to 75% only.

2. They can be modified during the year depending on the actual level of sales, production costs etc.

3. Can be updated with current data. For example, in cases where additional raw materials would be required during the year as production increases

Major Distinction between static and flexible budget:

1. A static budget is prepared at the beginning of the year and it cannot be changed until the start of a new year. On the other hand, flexible budget is a series of budgets prepared for various level of activities, revenues and expenses.

2. Flexible budget can be modified during the year for actual sales level etc. whereas a static budget is just that - static. It cannot be modified.

3. Static budget is very simplistic. Flexible budget is generally complex.

4. Static budget would take less time to prepare, whereas flexible budget needs much more time and effort

5. Static budget would be prepared in the basis of past data, whereas flexible budget is estimated on realistic situations and the expectations.

Examples

Static budgets are used by Non- Profit organisations, educational institutions and government organisations since they have been granted a specific amount of money to be allocated for a period.

Flexible budget is suitable to all kinds of organizations.