Flexible budget

Definition

A flexible budget adjusts for changes in the level of activity, such as sales volume or production levels. It provides a more accurate comparison of actual results to budgeted amounts by accommodating fluctuations in operational conditions.

5 Must Know Facts For Your Next Test

1. Flexible budgets are dynamic and adjust based on different levels of activity, unlike static budgets which remain fixed.
2. They help in analyzing variances by providing a realistic benchmark for performance evaluation.
3. Flexible budgets are particularly useful in industries with unpredictable or seasonal variations in activity levels.
4. They consist of variable costs that change with activity level and fixed costs that remain constant regardless of activity level.
5. The process involves preparing multiple budget scenarios to reflect various potential levels of output.

Review Questions

• What is the primary difference between a flexible budget and a static budget?
• How does a flexible budget help in variance analysis?
• Why might a company prefer using a flexible budget over a static budget?

Related terms

Static Budget: A budget that remains unchanged regardless of changes in business activity levels.

Variance Analysis: The process of comparing actual results to budgeted figures to identify differences and their causes.

Fixed Costs: Costs that do not change with the level of production or sales activities within certain limits.