What is a flexible budget? What types of organizations may use flexible budgets? Why are flexible budgets
useful?
A flexible budget is a budget that is used to project various levels of activities. The
flexible budget is used in conjunction with the static budget in that it uses the static
budget information and applies it to different levels of activity. The reason why
some companies would use a flexible budget is so the business can respond quickly
to keep the company profitable. For example, a restaurant might use a flexible
budget. The restaurant needs to be prepared for a budget whether they serve 100,
200, or 300 customers. If they used a static budget and only budgeted enough for
100 customers and they had 200 in an evening they would have budgeting issues.
To be able to evaluate if the budget is operating correctly, management would
need to look at the budget prepared for the 200 customers. When preparing a
flexible budget you use the same selling price and cost assumptions you would use
with the original static budget, the difference being management would recalculate
these numbers based on the level of activity, as explained by the restaurant
example. Flexible budgets can be very useful for companies that have different
levels of activities because it allows the company to meet the changing everyday
needs of the company’s business activities.
Flexible budget is a budget that recognizes cost drivers of overhead budgeting and cost. A flexible
budget is a budget that adjusts or flex according to the changes in activities. Kimmel, Weygandt, and
Kieso (2009) states that in contrast to a static budget, which is based on one level of activity, a flexible
budget projects budget data for various levels of activity. A flexible budget shows the budgeted
volumes and the differences between those volumes/amounts. When the net income becomes lower
than what was planned the variance become undesirable therefore, when a business generate higher
revenues the variance become favorable. Another cause of undesirable variance is related to higher
expenses and costs.
Every major/big organization i.e. manufacturing, and according to Kimmel, Weygandt, and Kieso
weekly reading, steel companies, and hotels could also use flexible budgeting. In a nut shell everyone
uses flexible budgeting. Flexible budgeting is useful, and because it could provide the business with
information that can assist in obtaining continual profit by having first hand insights, if there is a
variation in costs. Flexible budgeting or budgeting in general is an important tool for
management/business to be used as a roadmap to successfully plan a budget for the following
year. The budgets could be used to compare real time results, and identify areas that are not on course
with the project budget.
Reference
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business
decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons