Question

Search on the internet to find some real world example of the application of flexible budgets or standard costs

Answer 1

A flexible budget is one that you adjust based on changing costs and revenue. You build your budget at the beginning of the fiscal year, accounting for how much money your business has, needs and expects to make.By flexing its budget a company can anticipate and (more important) accommodate its needs. For example, a seasonal business might create a flexible budget that anticipates changing staff levels as customers come and go over the course of the year. Or a company that conducts product development might allow for greater research investment in case of strong sales.

Let's start with an example of flexible budget in practice. We'll keep it broad. There's no need to get too deep in the weeds. To avoid complication we will use post-tax numbers.

Annual Income - $60,000

January Income - $5,000

• Salary - $5,000

January Expenses - $3,615

• Rent - $1,500

• Bills/Recurring Expenses - $1,015

-The New York Times - $15

-Phone Bill - $60

-Electric Bill - $50

-Cable and Internet - $60

-Heat - $80

-Student Loans - $750

• Daily Expenses - $600

-Groceries - $250

-Entertainment - $250

-Transportation - $100

• Vacation Fund - $500

January Savings - Remainder

• Savings Goal - $1,000

In January we can put $1,385 into general savings, so we don't need to make any adjustments to hit our $1,000 goal.

Now let's say that in January we got into a fender bender. It cost $1,500, taking a huge chunk out of our monthly budget. Since this is a flexible budget, we can adapt and might adjust as follows:

February Income - $5,000

• Salary - $5,000

February Expenses - $4,365

• Mechanic From January - $1,500

• Rent - $1,500 (We can't adjust this.)

• Bills/Recurring Expenses - $1,015 (We also can't really adjust this without making a major quality of life adjustment.)

-The New York Times - $15

-Phone Bill - $60

-Electric Bill - $50

-Cable and Internet - $60

-Heat - $80

-Student Loans - $750

• Daily Expenses - $350 (Here we have some wiggle room by having a boring, stay-at-home month.)

-Groceries - $250

-Entertainment - $0

-Transportation - $100

• Vacation Fund - $500 (We have some space here too by skipping our contribution to the upcoming vacation fund.)

February Savings - Remainder

• Savings Goal - $1,000