How do you prepare a flexible budget?

Expert Solution

In those industries where the pattern of demand is stable, a fixed budget may be adequate, especially where the budget period is comparatively short. In such businesses, it is possible to forecast sales with a considerable degree of accuracy.

There are many undertakings where stable conditions are absent. In such concerns, it is usual to adopt the flexible budgetary technique. A flexible budget is a budget which is designed to change in accordance with the level of activity actually attained.

Preparation of flexible budget results in the construction of a series of formula, one for each department or cost center. The formula for each account indicates the fixed amount and/or a variable rate.

The fixed amount remains constant regardless of activity and the variable potion is expressed in relation to a base such as direct labour hours, direct labour cost, or machine hours.

Originally, the flexible budget idea was applied principally to the control of departmental factory overheads. In recent years, the idea has, however, been applied to the entire budget so that production budgets as well as selling and administrative budgets are prepared on a flexible basis.

ekkarill92 answered 1 year ago

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