What is flexible budget?
A budget, prepared for different levels of activities is called flexible budgeting. The flexible budget is otherwise called as variable budget, dynamic budget, sliding scale budget, step budget, expenses formula budget and expenses control budget.
Why is flexible budget prepared?
The main reason for preparing a flexible budget is that every business is dynamic and ever changing. Hence, a flexible budget is prepared according to the relevant range of production. A reliable basis is available from flexible budget for comparisons.
Steps involved in flexible budgeting
The following steps or stages are involved in the preparation of flexible budget.
1. Decide a range of activity for which the budget is to be prepared.
2. Determine the cost behavior pattern (Fixed, Variable and Semi-variable) for each element of costs that are included in the flexible budget.
3. Prepare the budgets for each level of activity with corresponding costs.
Advantages of flexible budgeting
The following are the advantages of flexible budgeting.
1. Accurate Budgeting: A flexible budget is prepared for different range of activity. Hence, the actual performance can be compared with the budget. More accurate budget is prepared by this way.
2. Accurate Performance Measurement: It incorporates changes in activity level and compares actual results with the budget in terms of output achieved. It facilitates more meaningful measurement of actual performance.
3. Co-ordination: A flexible budgets brings co-ordination among various departments. A production budget is prepared on the basis of sales budget, materials budget and personnel budge. In this way, co-ordination is obtained in an organization.
4. A Tool of Cost Control: The flexible budget facilitates comparisons of budgeted costs with actual costs. Hence, the responsibility is fixed on executives for deviations. In the long run, the employees are motivated themselves in controlling costs for which they are responsible.