Question

What is a flexible budget? What types of organizations might use flexible budgets? Why are flexible budgets useful?

Answer 1

Flexible budget- It is a budget that is utilized to project different levels of activities. This budget is utilized as a part of conjunction with the static budget in that it utilizes the information of static budget and applies it to different levels of activities. The motivation behind why a few organizations would utilize a flexible budget is so the business can react quickly to stay with the profitable. For instance, a restaurant may utilize a flexible budget. The restaurant needs to be set up for a budget whether they serve 150, 250, or 350 customers. On the off chance that they utilized a static budget and just budgeted enough for 150 customers and they had 250 out of an evening they would have budgeting issues. To have the capacity to assess if the budget is operating as per the expectation, managers would need to take flexible budget in case of deviation.. While setting up a flexible budget you utilize a similar selling price and cost assumptions as you will use with the original static budget, but the difference being the managers would recalculate these numbers in light of the level of activity, as clarified by the restaurant case. Flexible budgets can be extremely helpful for organizations that have different levels of activities since it enables the organization to meet the changing everyday needs of the business activities of the firm.

Here are some advantages of flexible budget-

1. The budgets could be utilized to compare real time results, and recognizing areas which are not on course with the project budget.
2. Flexible budget is an imperative apparatus for management to use as a roadmap to effectively design budget for the following financial year.
3. A flexible budget enables an organization to roll out improvements when activities surpass or don't meet expectation.

So from the above analysis we can say that is useful for the companies which are restaurants, manufacturing companies, hotels etc.

Answer 2

Meaning Of flexible budget

“a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained.” Unlike static (fixed) budgets, flexible budgets show the expected results of a responsibility center for different activity levels.

You can think of a flexible budget as a series of static budgets for different levels of activity. Such budgets are especially useful in estimating and controlling factory costs and operating expenses. It is more realistic and practicable because it gives due consideration to cost behaviour at different levels of activity. While preparing a flexible budget the expenses are classified into three categories viz.

1. Fixed,
2. Variable, and
3. Semi-variable.

Advantages of flexible budget :

1. With the help of flexible budget, the sales, costs and profit may be calculated easily by the business at various levels of production capacity.
2. In flexible budget, adjustment is very simple according to change in business conditions.
3. It also helps in determination of production level as it shows budgeted costs with classification at various levels of activity along with sales. Hence the management can easily select the level of production which shows the profit predetermined by the owners of the business.

Flexible budgeting may be resorted to under following situations:

1. In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product accurately.
2. Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade may have enough market if temperature goes below the freezing point.
3. In the case of labour intensive industry where the production of the concern is dependent upon the availability of labour.

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