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In: Accounting

Question 1 Distinguish between static and flexible budgets and explain the advantages of using a flexible...

Question 1

Distinguish between static and flexible budgets and explain the advantages of using a flexible budget for control, compared with using a static budget.

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Expert Solution

Difference:

BASIS STATIC BUDGET FLEXIBLE BUDGET
Meaning It is a budget which does not change from the actuals whatever be the level of activity. The revenue and costs budgeted remain fixed. It is a budget that changes with a change in level of activity.
Activity level It is preferable only for the activity level for which it is prepared. It can be modified according to the level of activity being performed.
Rigidity Since it is beneficial for a single level of activity, it does not accept changes. Hence, it is very rigid. As the name suggests, it is flexible as it supports any level of activity.
Decision making It cannot be used for correct decision making as budgeted and actual scenario may vary significantly. It can facilitate decision making as costs and revenues at different capacity levels can also be identified.
Comparative analysis If actual and budgeted levels are different, comparison is not possible. Comparison is possible even if actual and budgeted levels are different.

Advantages of flexible budget over static budget:

  1. In real world, exact levels of operations cannot be predicted. So, flexible budget is beneficial as it can be re-casted based on the actual level of activity.
  2. Variance analysis performed using a flexible budget generates useful information for comparison.
  3. It recognizes differences between fixed, semi-variable and variable costs which facilitates ascertaining of cost on change in level of activity.

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