Question

EPPUPILLUS ELLU VEELUILDILE EVALULIO. Define the following terms: static budget, flexible budget. Describe the appropriate use of a "before-the-fact" and an "after-the-fact" flexible budget. Why must mixed costs be broken down into the fixed and variable components?

Answer 1

Static budget,

It is a budget, which will be constant, even if there is a huge change in the volume of production.

For example, the budget for variable overheads will remain as the as the same even for 100 units or else for 1000 units.

Flexible budget,

It is a budget which changes with the change in the volume of sales, it is most widely used budget than static budget. Flexible budget calculates the budget on the basis of units and the budget changes for every single unit change in the volume.

Before vs after the fact flexible budget,

Before the fact flexible budget gives the budget for various output levels, that is it shows the budget for different volumes of outcome, whereas after the fact flexible budget is prepared to remove the flexible budget variences that is the difference between budgeted and actual performance.

Requirement of fixed and variable cost,

The costs must be divided into fixed and variable costs because, variable costs are those incurred for the product and changes with the change in the volume whereas fixed cost is the cost incurred irrespective of the volume, it is the period cost, therefore for the purpose of proper allocation of costs they must be divided into variable and fixed costs.

Moreover variable costs are absorbed only for the number of units sold whereas fixed costs are absorbed fir the entire amount irrespective of the volume.