Creating a flexible budget Accounting and Accountability

The original budget assumed 17,000 Pickup Trucks would be sold at $15 each. To prepare the flexible budget, the units will change to 17,500 trucks, and the actual sales level and the selling price will remain the same. Given that the variance is unfavorable, management knows the trucks were sold at a price below the $15 budgeted selling price. In theory, a flexible budget is not difficult to develop since the variable costs change with production and the fixed costs remain the same. However, planning to meet an organization’s goals can be very difficult if there are not many variable costs, if the cash inflows are relatively fixed, and if the fixed costs are high. For example, this article shows some large U.S. cities are faced with complicated budgets because of high fixed costs.

Identify fixed and variable costs

A robust flexible budget will have a plan for these scenarios and allocate funds accordingly. Because flexible budgets allow companies to adjust how much they spend on different https://www.quick-bookkeeping.net/how-to-print-invoice-from-i/ business activities, it helps them more effectively manage their cash flow. Flexible budgets, to state the obvious, help companies be more flexible with their spending.

11: Flexible Budgets

The lack of a variance indicates that costs in total (materials, labor, and overhead) were the same as planned. Lobster Instant Noodles make instant ramen noodles in cups that are commonly eaten by university students across the world. Simply add boiling water, close the lid for 3 minutes and you’ve got an instant meal.

Good for companies with variable costs

What is not known from looking at it is why the variances occurred. A flexible budget flexes the static budget for each anticipated level of production. This flexibility allows management to estimate what the budgeted numbers would look like at various levels of sales. Flexible budgets are prepared at each analysis period https://www.quick-bookkeeping.net/ (usually monthly), rather than in advance, since the idea is to compare the operating income to the expenses deemed appropriate at the actual production level. Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity.

Early in the chapter, you learned that abudget should be adjusted for changes in assumptions or variationsin the level of operations. Managers use a technique known asflexible budgeting to deal with budgetary adjustments. Aflexible operatingbudget is a special kind of budget that providesdetailed information about budgeted invoice templates in adobe illustrator expenses (and revenues) atvarious levels of output. A flexible budget cannot be preloaded into the accounting software for comparison to the financial statements. Only then is it possible to issue financial statements that contain budget versus actual information, which delays the issuance of financial statements.

1. Now you know all about how to create and use a flexible budget.
2. A flexible budget can be created that ranges in level of sophistication.
3. If production is higher than planned and has been increased to meet the increased sales, expenses will be over budget.
4. Notice how the variable costs changewith volume but the fixed costs remain the same.
5. In this situation, there is no point in constructing a flexible budget, since it will not vary from a static budget.
6. Companies around the globe experienced this in March 2020 when the COVID-19 pandemic required lockdowns that grounded much of the economy to a halt.

Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures. Then the budgeting staff completes the remainder of the budget, which flows through the formulas in the flexible budget and automatically alters expenditure levels. Big Bad Bikes used the flexible budget concept to develop a budget based on its expectation that production levels will vary by quarter. By the fourth quarter, sales are expected to be strong enough to pay back the financing from earlier in the year. The budget shown in Figure 7.25 illustrates the payment of interest and contains information helpful to management when determining which items should be produced if production capacity is limited.

In short, a flexible budget requires extra time to construct, delays the issuance of financial statements, does not measure revenue variances, and may not be applicable under certain budget models. And if you’d like to create a flexible budget for your organization, Prophix can help. minimum level of stock explanation formula example With Prophix, you can quickly and easily create scenarios and calculate your budget analysis, minimizing the two biggest time sucks of the budgeting process. One of the biggest advantages of the consistency inherent in a static budget is the clean comparisons that it allows for.