Flexible Budgets
Things You Must Know
Cost Accounting
Terms and Definitions:
Static Budget
Prepared at the beginning of the period, valid only for one planned level of activity.
The activity would be either sales volume or units produced.
Flexible Budget
Provides estimates for what costs should be for different levels of sales volume or units produced.
Management can then compare the actual results to the budget for the actual sales volume or units produced.
Purpose of a Flexible Budget
Reports the expected sales, costs, and profits at various levels of sales or production.
The format can also include only costs to evaluate costs during the period.
Example of a “Flexible Budget”
| Sales or Units Produced – various | ||||||
| Sales Volumes |
100
|
200
|
300
|
400
|
500
|
|
| Sales* |
$p
|
$q
|
$r
|
$s
|
$t
|
|
| – Variable Costs ** |
|
|
|
|
|
|
| – VC Direct Materials |
$x
|
$y
|
$z
|
$a
|
$b
|
|
| – VC Direct Labor |
$c
|
$d
|
$e
|
$f
|
$g
|
|
| – VC Sales Commission |
$h
|
$i
|
$j
|
$k
|
$l
|
|
| = Contribution margin |
$
|
$
|
$
|
$
|
$
|
|
| – Fixed Costs **** |
|
|
|
|
|
|
| – FC Manufacturing Overhead |
$v
|
$v
|
$v
|
$v
|
$v
|
|
| – FC General & Administrative |
$u
|
$u
|
$u
|
$u
|
$u
|
|
| – FC Selling |
$w
|
$w
|
$w
|
$w
|
$w
|
|
| Total Fixed Costs |
$
|
$
|
$
|
$
|
$
|
|
| Operating Income/Income before Tax |
$$
|
$$
|
$$
|
$$
|
$$
|
|
* The total sales $ will vary at different volumes
** Variable cost $ amounts will vary and = sales/units produced x the variable cost per unit
*** Fixed costs are the same and do not change regardless of the volume of sales/production
When the actual volume is known, management compares the budget for that particular volume to the actual cost to determine the variance (the difference between budget and actual).
Favorable:
Actual costs are less than budgeted cost at that level of activity
Unfavorable:
Actual costs are more than budgeted cost at that level of activity
A variance report using a flexible budget can be done using a 3-column report where the budget and actual dollars are based on the same level of sales or production:
Budget Actual Variance