A flexible budget adjusts to changes in actual revenue levels. Actual revenues or other activity measures are entered into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs. The budget is then compared to actual expenses for control purposes.
In this way, what is the main objective of preparing flexible budget?
The purpose of Flexible budget is to: a) Provide management slack in their budget b) Eliminate fluctuations in production reports c) Compare actual and budgeted results at various level of activity d) Make the annual budget process more efficient.
how do you create a flexible budget? To compute the value of the flexible budget, multiply the variable cost per unit by the actual production volume. Here, the figure indicates that the variable costs of producing 125,000 should total $162,500 (125,000 units x $1.30).
Then, what is flexible budget example?
Flexible budget – example It requires $8 per MH. MH stands for machine hour. The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month. Fixed costs do not change each month, i.e., they remain the same. Insurance premiums and rent, for example, are fixed costs.
Is a flexible budget always better?
The greatest advantage that a flexible budget has over a static budget is its adaptability. In the real world, change is real and it is constant. A flexible budget can handle that reality and better position a company for the challenges of the marketplace. Fixed versus variable expenses in a flexible and static budget.
19 Related Question Answers Found
What are the types of budget?
The following types of budgets are commonly used by businesses: Master Budget. A master budget is an aggregate of a company’s individual budgets designed to present a complete picture of its financial activity and health. Operating Budget. Cash Flow Budget. Financial Budget. Static Budget.
What are basic processes in preparing flexible budget?
The process of preparing a flexible budget involves altering those expenses that change with revenues. This is normally done on a percentage basis. For example, a certain expense, say, raw material costs, may always be a certain percentage of the total cost of production.
How does a flexible budget work?
A flexible budget is a budget that adjusts or flexes with changes in volume or activity. For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount.
What is the purpose of using standard costs?
Standard Costing System. In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance. A standard costing system involves estimating the required costs of a production process.
How do you calculate activity variance?
The first step in activity-based variance analysis is to assign all overhead costs to a level of activity. Next, activity standards (standard rates) must be calculated. To reach this standard rate, the annual overhead cost is divided by the cost center’s practical capacity.
What is zero based budgeting?
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.
What is a functional budget?
functional budget. The cost and income plan created for a particular process or department operating within a business. For example, a functional budget for the manufacture of a product line might include estimated costs of production, marketing, sales, labor, equipment and materials, as well as projected sales income.
What are three types of flexible expenses?
There are three major types of expenses we all pay: fixed, variable, and periodic.
What is a flexible budget report?
A flexible budget performance report is used to compare actual results for a period to the budgeted results generated by a flexible budget. If the flexible budget model is designed to adjust to actual sales inputs in a reasonable manner, then the resulting performance report should closely align with actual expenses.
What is production budget example?
Production Budget Definition The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand).
What is budget planning?
Budget planning is the process by which a company or individuals evaluate their earnings and expenses and project their monetary intakes and outakes for the future. The goal is to lay out all necessary components and brainstorm future goals.
How a flexible budget is prepared?
Preparation of a Flexible Budget. The flexible budget uses the same selling price and cost assumptions as the original budget. Variable and fixed costs do not change categories. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement is sales units.
What is a flexible budget performance report?
Definition: A flexible budget performance report is a management report that compares the actual revenues and costs for a period with the budgeted revenues and costs based on the actual sales volume.
What is flexible and fixed budget?
The budget designed to remain constant, regardless of the activity level reached is Fixed Budget. The budget designed to change with the change in the activity levels is Flexible Budget. Flexible budget can be easily modified in accordance with the activity level attained.
When a flexible budget is used in performance evaluation?
When a flexible budget is used in performance evaluation, actual costs are compared to the static planning budget rather than to what the costs should have been for the actual level of activity during the period. A flexible budget should not be used when making comparisons to actual results such as actual expenses.
What is a breakeven chart?
A break even chart is a chart that shows the sales volume level at which total costs equal sales. The chart plots revenue, fixed costs, and variable costs on the vertical axis, and volume on the horizontal axis.
What is variable budget?
Definition: A flexible budget, also called a variable budget, is financial plan of estimated revenues and expenses based on the current actual amount of output. Management often uses flexible budgets before a period to predict both a best case and worse case scenario for the upcoming accounting period.
What does it mean to create a budget?
Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.
What is a Master Budget?
The master budget is the aggregation of all lower-level budgets produced by a company’s various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan. Direct materials budget.