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Flexible Budgets sound a bit like an oxymoron but really they're not. Budgets are usually built on an assumption or set of assumptions such as units produced, cargo moved, or customers helped. If these assumptions are achieved then the expenses anticipated in the budget should occur and variances calculated are valid. But, let's say that drastic change occurs in your industry rendering the assumptions upon which the budget was built hopelessly outdated. Examples of this could be the loss of a critical vendor or the influx of a major new customer. This would make comparisons of actual expenses to outdated budget expenses worthless. But flexible budgets can attempt to compensate for such changes by flexing the budgeted expenses based on changes to those underlying assumptions.Ok, here's a simplified example:
You make widgets. You forecast with all known information at budget time that there will be a market for your widgets of 100 next year. It cost you $2 per widget to make so your expenses would be $200. As you cruise through second quarter your sales team pulls off the order of the century and now you anticipate selling 10,000 widgets. Yippie! But suddenly your expenses are through the roof - duh - and at year's end you have expenses of $19,000. Comparing this to the budget of $200 you have a negative variance of $18,800. Is that bad to have expenses of $19,000? No. Your budget is not reflecting the new reality of selling 10,000 widgets.
Here's where flexible budgeting comes in. You establish what your budgeted expenses should "flex" on. In our case it would be widgets and by what relationship your expenses should flex. In our example above the relationship is $2 per widget. If your budget "flexed" on the number of widgets, the expenses would now be $20,000 and with this new number the variance calculation would make more sense.
Hope this helps.
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∙ 14y ago
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What factor does the rolling budget technique help to overcome?
Rolling budgets have many benefits. They are more flexible than static budgetsÊand allow for changes to be made in the system easier.
All budgets depend on the sales budget?
Yes, all budgets depend on sales budgets because budgets can't exceed the amount of available money. When sales are poor, the budgets will be smaller.
What are non-financial budgets?
Budgets are not expressed in dollar value termed non-financial budgets.
How many budgets have been presented up to date?
Budgets for what specifically?
What is the advantages of budgets?
yes i think so too
What are fixed and flexible budgets?
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If you have actual how do you get flexible budget?
Flexible budgets are prepared for different capacity levels like normal capacity, optimistic capacity and pesimistic capacity based on actual budgets.
Is it best to choose an activity measured in dollars when choosing an acitivy measure for flexible budgets?
The activity base should not be expressed in dollars or other currency. For example, direct labor cost is usually a poor choice for an activity base in flexible budgets. Changes in wage rates affect the activity base but do not usually result in a proportionate change in overhead. Therefore, it is normally best to use physical, rather than financial, measures of activity in flexible budgets..Answer - NO
A major weakness of flexible budgets is?
they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity.
What factor does the rolling budget technique help to overcome?
Rolling budgets have many benefits. They are more flexible than static budgetsÊand allow for changes to be made in the system easier.
How are statistics budgets revenue budgets and operating budgets related?
ask your brain
All budgets depend on the sales budget?
Yes, all budgets depend on sales budgets because budgets can't exceed the amount of available money. When sales are poor, the budgets will be smaller.
What is operational budgets?
About operational budgets can be read in
What are non-financial budgets?
Budgets are not expressed in dollar value termed non-financial budgets.
How many budgets have been presented up to date?
Budgets for what specifically?
What is the department strategy and budgets?
A department of strategy and budgets dur lol
What are the advantages and disadvantages of flexible budgeting?
In short, flexible are much more adventagous in comparison to static planned budgets. Static budgets are prepared before the period, therefore the amount of units sold are likely to be incorrect. This is fine, because it's a budget, but it is not very useful for decision making. Flexible budgets are prepared once the number of actual units sold is known. Think about it this way. If a company sells 200 units, but the static budget predicted 100, all of your expenses are going to result in unfavorable variances. However, expenses would be expected to increase with an increase in sales. Therefore, it is adventagous in terms of decision making based on the variances. The varainces tell managers such things as the efficiency of labor and material usages, as well as the price variances. Hope this helps, but there's tons of info out there for you to find.
