Also, a great deal of time can be spent developing cost formulas, which is more time than the typical budgeting staff has available in the midst of the budget process. One problem with its formulation is that many costs are not fully variable, instead having a fixed cost component that must be calculated and included in the budget formula. Though the flex budget is a good tool, it can be difficult to formulate and administer. However, there are also a number of serious issues with it, which we address below. The flexible budget at first appears to be an excellent way to resolve many of the difficulties inherent in a static budget. However, before deciding to switch to the flexible budget, consider the following countervailing issues. These points make the flexible budget an appealing model for the advanced budget user. Then the budgeting staff completes the remainder of the budget, which flows through the formulas in the flexible budget and automatically alters expenditure levels. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures. Budgeting Efficiencyįlexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers - the budget should closely align to expectations at any number of activity levels. The flexible budget is especially useful in businesses where costs are closely aligned with the level of business activity, such as a retail environment where overhead can be segregated and treated as a fixed cost, while the cost of merchandise is directly linked to revenues. The flexible budget is an appealing concept. A sophisticated flexible budget will change the proportions for these expenditures if the measurements they are based on exceed their target ranges. Advanced Flexible BudgetĮxpenditures may only vary within certain ranges of revenue or other activities outside of those ranges, a different proportion of expenditures may apply. If so, one can integrate these other activity measures into the flexible budget model. For example, telephone expenses may vary with changes in headcount. Some expenditures vary with other activity measures than revenue. In the case of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales. There is typically a percentage built into the model that is multiplied by actual revenues to arrive at what expenses should be at a stated revenue level. Basic Flexible BudgetĪt its simplest, the flexible budget alters those expenses that vary directly with revenues. In short, a flexible budget gives a company a tool for comparing actual to budgeted performance at many levels of activity. Several variations on the concept are noted below. This means that the variances will likely be smaller than under a static budget, and will also be highly actionable.Ī flexible budget can be created that ranges in level of sophistication. Budget versus actual reports under a flexible budget tend to yield variances that are much more relevant than those generated under a static budget, since both the budgeted and actual expenses are based on the same activity measure. This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels.
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