Question

In any type manufacturing business, there are many cost concerns—some are immediately obvious while others are hidden. If you started a manufacturing business, what type of budget would you choose, static or flexible? Explain why, and include the advantages and drawbacks of your choice.

Answer 1

I would choose flexible budget as it can adjust with the changes in volume or activities. It is more like a static budget with a high degree of flexibility and in such business where many costs are hidden in nature, It is better to be flexible so that one may record such costs accordingly.

Advantages of Flexible budget-

1. This budget can be re adjusted on the basis of activity levels and it is not rigid.

2. It helps the company to determine in production level on Different environment

3. It is accompanied with better cost control

4. It helps in taking advantages of new opportunities in different markets condition.

Limitations of flexible budget-

1.It is highly complex and confusing in nature as it keeps on changing and difficult to implement.

2.This budget requires a large number of skilled labours and it is not easy to have much of them in an industry.

3.It becomes difficult to prepare flexible budgets as each costs are to be analysed seperately.

4.It is also a highly expensive exercise.