Question

Write a response to the following in a minimum of 500 words:

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.

Differentiate between the 2 types of budgets and include the following in your response:

• 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.

Answer 1

Definition- A budget is a document of expected Incomes and Expenses of an organization for a given period of a time. A budget is planned so our expenses are controlled and we spend less than what we make for each period. Budgeting is mostly a monthly activity and are carried out by financial planners at the beginning of each month considering the future scenarios and in support of the past data.

Primarily the two main types of budget used by management in planning its activities are Static/ Fixed budget and Flexible budget. Under mentioned are some key differences of both the types of budgets.

Particular	Fixed Budget	Flexible Budget
Meaning	Fixed budgets are budgets that do not change on account of change in volumes eg. Sales/ purchase/ production etc.	A flexible budget is a one that changes or remains flexible in volume or from its activity level.
Nature	A Fixed budget is static in nature	A flexible budget is dynamic in nature
Assumptions	Fixed budgets assume that conditions will remain same as budgeted/ projected by the management.	Flexible budget has provisions for change in level of activity and it knows that the levels may change.
Activity Level	It is Based on a Single level of activity.	It is based on more than one level of activity.
Uses	A fixed budget has a limited utility level due to its rigid nature	A wide range of organisations due the flexible budget due to its dynamic nature and ease to use.
Costs included	Fixed cost is considered and variable cost is considered as a percentage of fixed cost on the basis of pre determined units assumed.	Flexible budgets would take into account both kinds of cost but will vary as per the units produced/ sold/ purchased.
Variance	There are large variances due to its fixed nature.	Variances are relatively lower but very significant as a budget is constantly revised.

· An example of the type of business or company that would benefit from using a flexible budget:-

Flexible budget might be useful to a seasonal business as the nature itself keeps on changing and along with that it anticipates changing staff levels as customers come and go over the course of the year. Say for example a Umbrella manufacturer is not aware of the monsoon levels the city might face this year and how many customers will be willing to actually purchase from him this year is a dilemma that may hamper its budget which forces it to use a flexible budget. Other businesses where the fixed cost/ variable cost keeps on changing due to its dynamic market nature such as metals/ crude oil/ natural resources it becomes very difficult to maintain a budgeted level in case of a fixed budget.

· A for using a flexible budget over a static budget is that the organization my alter its variables depending upon the current scenario and woul be able to properly identify its variance and act in real time manner. Due to its dynamic nature most of the corporation prefer genrating a flexible budget over a static one.