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How to prepare a flexible budget for different levels of activity

How to prepare a flexible budget for different levels of activity

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Answer:- A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. This budget is also known as variable budget.A flexible budget is usually designed to predict effects of changes in volume and how that affects revenues and expenses. In order to accurately predict the changes in costs, management has to identify the fixed costs and the variable costs. Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases.

Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced. In a flexible budget, fixed costs stay constant whereas variable and semi-variable costs change according to a standard predetermined at the beginning of an accounting period.

A typical budget is usually formatted with five columns. The first column lists the sales and expense categories for the company. The second column lists the variable costs as a percentage or unit rate and the total fixed costs. The next three columns list different levels of output and the changes in variable costs based on the increased or decreased sales.

ekkarill92 answered 1 year ago
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