7 4 Prepare Flexible Budgets Principles of Accounting, Volume 2: Managerial Accounting

flexible budget meaning

Both manufacturing and non-manufacturing companies can benefit from a master budget. A master budget is a central planning tool that gives an overview of a business’s finances, outlining cash flow forecasts, financial statements, and the financial plan. Small business have less revenue than large businesses and it’s even more important for them to get their costs and profits right because the risks are greater.

  • Additionally, flexibility supports better cost management, promoting efficiency and resource optimization within the organization.
  • Your flexible budget would then look at revenue, based on both units sold and sales price.
  • Even if a cost is assigned a numerical value, a monthly review of costs compared to revenue allows that number to be changed for future periods.
  • Most companies will start with a master budget, which is a projection for the overall company.
  • If such predictive planning is not possible, there will be a disparity between the static budget and actual results.
  • And the reality is that the effort you put into tying certain line items together may not be worth the time.

The master budget allows company directors to forecast the actions they will need to take in the upcoming quarter or year to meet their goals. Unlike a static budget, a flexible budget changes or fluctuates with changes in sales, production volumes, or business activity. A flexible budget might be used, for example, if additional raw materials are needed as production volumes increase due to seasonality in sales. Also, temporary staff or additional employees needed for overtime during busy times are best budgeted using a flexible budget versus a static one. Those siloes make flexible budgeting nearly impossible and limit the strategic value of an over-stretched finance team.

Intermediate Flexible Budget

So as headcount increases, the cost of benefits also increases according to the per-employee assumption. Better yet, when you have real-time budget visibility, you can forecast or update your budget (as needed) and see those updates reflected on other key metrics that matter to your business. The budget shown in Figure 10.27 illustrates the payment of interest and contains information helpful to management when determining which items should be produced if production capacity is limited.

A static budget is a budget with numbers based on planned outputs and inputs for each of the firm’s divisions. A static budget is usually the first step of budgeting, which determines how much a company has and how much flexible budget meaning it will spend. The static budget looks at fixed expenses, which are not variable or dependent on production volumes and sales. For example, rent would be a fixed cost regardless of the sales volume for a company.

What Does Flexible Budget Mean?

Then, they can modify the flexible budget when they have their actual production volume and compare it to the flexible budget for the same production volume. A flexible budget is more complicated, requires a solid understanding of a company’s fixed and variable expenses, and allows for greater control over changes that occur throughout the year. For example, suppose a proposed sale of items does not occur because the expected client opted to go with another supplier. In a static budget situation, this would result in large variances in many accounts due to the static budget being set based on sales that included the potential large client.

flexible budget meaning

Everything starts with the estimated sales, but what happens if the sales are more or less than expected? What adjustments does a company have to make in order to compare the actual numbers to budgeted numbers when evaluating results? If production is higher than planned and has been increased to meet the increased sales, expenses will be over budget. To account for actual sales and expenses differing from budgeted sales and expenses, companies will often create flexible budgets to allow budgets to fluctuate with future demand. With a flexible budget, budgeted dollar values (i.e., costs or selling prices) are multiplied by actual units to determine what particular number will be given to a level of output or sales. A static budget is a type of budget that incorporates anticipated values about inputs and outputs that are conceived before the period in question begins.

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