Question

are flexible budgets appropriate for non-manufacturing entities? Why or why not?

Answer 1

Yes, flexible budgets are appropriate for non-manufacturing entities also. Non- manufacturing organizations too have revenues and costs, and performance evaluation of managers and employees. The elements and nature of cost in a service entity might be different from that of a manufacturing entity, but that does not mean that budgeting is only required by the manufacturing sector.

Flexible budgets are drawn up for different levels of activity within a range by translating the static budget data, whereas a static or a planning budget is drawn up for only one level of activity. If the entity has performed at a different level, it would be meaningless to compare the actual results against the static budget which has been drawn up for a different level.

Suppose, the static budget is drawn up for 1,000 patient days in a hospital. And the actual number of patient days during a period is also 1,000. In this rare situation, a flexible budget would not be needed. But however, is the actual number of patient days achieved during the budget period is 900 or 1,050, comparing the actual results with the static budget would be meaningless. Performance evaluation would hence be distorted. The comparison would be more meaningful is it is done with flexible budgets drawn up for 900 or 1,050 patient days as the case may be.

Therefore, whether it is a manufacturing entity or a service organization, budgeting and budgetary control is an integral part of managerial accounting and control and performance evaluation of managers. And flexible budgets are extremely necessary, along with the planning budget.