Question

Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling operations of a business. Our textbook, Managing Accounting Concepts, describes 2 main types of budgeting: static budgets and flexible budgets.

Respond to the following in a minimum of 175 words:

• Differentiate between the 2 types of budgets.
• Provide an example of the type of business or company that would benefit from using a flexible budget.
• Provide support for your business selection and include the advantage for using a flexible budget over a static budget.

  Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling operations of a business. Our textbook, Managing Accounting Concepts, describes 2 main types of budgeting: static budgets and flexible budgets.

Answer 1

Flexible Budget can be understood as the budget created for different production levels or capacity utilization, i.e. it changes in accordance with the activity level. While fixed budget operates in only production level and under only one set of condition, flexible budget comprises of several budgets and works in different conditions.

Fixed Budget refers to an estimate of pre-determined incomes and expenditures, which once prepared, does not change with the variations in the activity levels achieved. It is also known as Static Budget.

Difference between flexible and fixed budget is as follows:-

Difference point	Fixed Budget	Static Budget
Meaning	The budget designed to remain constant, regardless of the activity level reached is Fixed Budget.	The budget designed to change with the change in the activity levels is Flexible Budget.
Performance Evaluation	Comparison between actual and budgeted levels cannot be done accurately, if there is a distinction in their activity levels.	It provides a good base for making a comparison between the actual and budgeted levels.
Scope	A static budget cannot ascertain costs correctly in case of any change in circumstances.	Flexible budget can easily ascertain costs in different levels of activities.
Pre requisites	Static budget is prepared without classifying the costs according to their variable nature.	Flexible budget is prepared by classifying the costs according to their variable nature
Rigidity	Fixed Budget cannot be modified as per actual volumes.	Flexible budget can be easily modified in accordance with the activity level attained.
Estimates	Based on assumption	Realistic and practical

Type of organisations which may use flexible budgets:

A flexible budget is a budget that is used to project various levels of activities. The flexible budget is used in conjunction with the static budget in that it uses the static budget information and applies it to different levels of activity. The reason why some companies would use a flexible budget is so the business can respond quickly to keep the company profitable. For example, a restaurant might use a flexible budget. The restaurant needs to be prepared for a budget whether they serve 100,200, or300 customers. If they used a static budget and only budgeted enough for100 customers and they had 200 in an evening they would have budgeting issues.To be able to evaluate if the budget is operating correctly, management wouldneed to look at the buget prepared for the 200 customers. When preparing aflexible budget you use the same selling price and cost assumptions you would usewith the original static budget, the difference being management would recalculatethese numbers based on the level of activity, as explained by the restaurant example. Flexible budgets can be very useful for companies that have different levels of activities because it allows the company to meet the changing everyday needs of the company’s business activities. Flexible budget is a budget that recognizes cost drivers of overhead budgeting and cost. A flexible budget is a budget that adjusts or flex according to the changes in activities. Kimmel, Weygandt, and Kieso (2009) states that in contrast to a static budget, which is based on one level of activity, a flexible budget projects budget data for various levels of activity. A flexible budget shows the budgeted volumes and the differences between those volumes/amounts. When the net income becomes lower than what was planned the variance become undesirable therefore, when a business generate higherrevenues the variance become favorable. Another cause of undesirable variance is related to higher expenses and costs.Every major/big organization i.e. manufacturing, and according to Kimmel, Weygandt, and Kieso weekly reading, steel companies, and hotels could also use flexible budgeting. In a nut shell everyone uses flexible budgeting. Flexible budgeting is useful, and because it could provide the business with information that can assist in obtaining continual profit by having first hand insights, if there is a variation in costs. Flexible budgeting or budgeting in general is an important tool for management/business to be used as a roadmap to successfully plan a budget for the following year.The budgets could be used to compare real time results, and identify areas that are not on course with the project budget.

Advantage of flexible budgets over static budget:-

The biggest advantage to a flexible budget is that it more accurately reflects the state of your finances. The alternative, static budgeting, can't account for unexpected expenses or changing income.

A flexible budget will help you track where you can adjust spending each month. It helps you to work your budget around priorities. This is particularly important when you're hoping to build savings or work towards a larger financial goal. When you must adjust your spending on an ad hoc basis, most often you end up short-changing your savings

A flexible budget also can help you to keep your budgeting lifestyle-friendly. When unexpected expenses crop up, it's easy to respond by pulling back from everything unnecessary in your life. By moving your money around you can see exactly how the numbers will work out, and can make sure to keep quality of life priorities from disappearing entirely.