Question

In 175 words respond to the following:

• What is a flexible budget? How does a flexible budget use cost behavior (fixed, variable, mixed)? Suppose you’re starting anew business – would you prepare a static budget or a flexible budget? Why?

Answer 1

Answer:

Budget- It is a statement of estimated income and expenditure for a given period of time.

Flexible budget- It is the budget that changes according to volume, as the name suggests, this budget is not fixed/static but flexible. When management wants to predict the changes in costs, it has to identify the fixed cost and the variable cost. Fixed cost is constant within a specific range while variable cost that vary according to volume or activity, flexible budget is the best because it will include a variable rate per unit of activity instead of fixed total amount.

These are the steps to construct flexible budget-

• First of all, identify all the fixed cost and segregated them as per the budget model.
• The level of variable cost that changes as activity measures changes.
• Entry of actual activity measures into the model after completion of accounting period, this updates the variable cost in the flexible budget.
• Entry of the final flexible budget of the completed period in the accounting system for comparison to actual expenses

If I am starting a new business, I will prepare flexible budget because it can be changed and updated but static budget cannot be changed. Flexible budget is most useful and important when measuring the managerial efficiency.