Question

Explain the usefulness of a flexible budget in specific business cases.: Explanation clearly details the usefulness of a flexible budget and why it provides more useful information than a static budget report.

Answer 1

A flexible budget refers to a budget that adjusts expenditure based on changes in actual revenue or other activities. It scale the initial budget to provide a meaningful comparison; thus informs whether the business is under or over-budget; and determine what caused business to fall or exceed below the expected gross profit. Flexible budgets provide better cost controls in specific business cases because it react more rapidly to adverse conditions. These are constantly updated with current data thus managers are regularly updating their projections and cost controls with current information. The differences between the actual results and the flexible budget are the variances in revenue and spending. The activity variances occurs due to the differences that arises because of the effectiveness with which resources are managed and changes in prices (the revenue and spending variances). Flexible Budget would be more useful under planning budgeting approach, as flexible budget can extend help in planning the potential changes in the level of output due to which cost of material, labor and overheads changes

A static budget, on the other hand, remains the same even if there are significant changes from the assumptions made during planning. The flexible budget is preferred over static budget because:

-- Comparison: Under flexible budget comparison is easy because of the similarity in the activity levels and on contrary under fixed budget comparison is hard because the activity levels are different at actual level and budgeted level.

-- Estimation: Flexible budget is prepared with situations that are realistic and practical. Conversely the static budget is mostly estimated on anticipations and assumptions.

-- Rigidity: It is easy to modify the flexible budget in accordance with the activity level attained; but the static budget cannot be modified according to the actual volume.