Question

What s the difference between a planing budget and a flexible budget? When would you use each of them?

Answer 1

Part-a : - Difference between planning budget and flexible budget

Basis for Comparison	Fixed Budget	Flexible 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.
Nature	Static in nature	It is Dynamic in nature
Activity Level	Only once in a year	Prepared in Multiple times
Performance Evaluation	Comparison between actual and budgeted levels cannot be done accurately, if there is a distinction in their activity level	It provides a good base for making a comparison between the actual and budgeted levels.
Rigidity	Fixed Budget cannot be modified as per the actual volume.	Flexible budget can be easily modified in accordance with the activity level attained.
	Fixed Budget is inelastic, as it cannot be re-casted as per the actual output	Conversely, the Flexible budget is elastic because it can be easily adjusted according to the volume of the production.

Part-b - Use of planning and flexible budget

Company uses planning budget in those activities which remains constant , change is less. Generally we apply for annual budget preparation. Flexible budget variances may be used to determine any shortcomings in actual performance during a given period. Flexible budget variances are simply the differences between line items on actual financial statements with those on flexed budgets. Flexible budget may also be useful in planning stage at the beginning of the accounting period.