What is difference between flexed budget and flexible budgeting? How many types of variance are calculated from these budgets?

Flexible Budget

Flexible Budget is a budget which (by recognising the difference between fixed, semi-fixed and variable costs) is designed to change in relation to the level of activity attained.

A flexible budget is a budget that is prepared for a range, i.e., for more than one level of ac­tivity. It is a set of alternative budgets to different expected levels of activity. The flexible budget is also known by other names, such as variable budget, dynamic budget, sliding scale budget, step budget, expenses formula budget and expenses control budget. The underlying principle of a flexible budget is that every business is dynamic, ever-changing, and never static.

A flexible budget might be developed that would apply to a “relevant range” of production, say 8,000 units to 12,000 units. Under this approach, if actual production slips to 9,000 units from a projected 10,000 units, the manager has a specific tool (i.e., the flexible budget) that can be used to determine budgeted cost at 9,000 units of output. The flexible budget provides a reliable basis for comparison because it is automatically geared to changes in a production activity.

When to use Flex Budgets?

• Activity is affected by weather condition like the soft drink industry;
• If company frequently introduces new product line like the food canning industry;
• If production is carried out only when orders are received from customers like shipbuilding,aircraft industries;
• Export orientated business

Fixed Budget

Fixed Budget: it remains unchanged irrespective of the level of activity actually attained. It is based on a single level of activity. A fixed budget performance report compares data from actual op­erations with the single level of activity reflected in the budget. It is based on the assumption that the company will work at some specified level of activity and that a stated production will be achieved. It suggests that the budget is not adjusted when production level changes.

In practice, fixed budgeting is rarely used. The main reason is that actual output is often significantly different from the budgeted output. In such a case the budget cannot be used for the purpose of cost control. The performance report may be misleading and will not contain very useful information. For example, if actual production is 12,000 units in place of the budgeted 10,000 units, the costs incurred cannot be compared with the budget which relates to different levels of activity.

Key Differences Between Fixed Budget and Flexible Budget

The following are the major differences between fixed budget and flexible budget:

1. The budget, which remains constant, regardless of the actual output levels is known as Fixed Budget. Flexible budget, is a budget which can be easily adjusted according to the output levels.
2. Fixed Budget is static in nature while Flexible Budget is dynamic.
3. Fixed Budget operates in only one activity level, but Flexible Budget can be operated on multiple levels of output.
4. Fixed Budget is based on the assumption, whereas Flexible Budget is realistic.
5. Fixed Budget is inelastic, as it cannot be re-casted as per the actual output. Conversely, Flexible budget is elastic because it can be easily adjusted according to the volume of output.
6. Flexible Budget proves more accurate to evaluate the performance, capacity and efficiency of the activity level compared to Fixed Budget.

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There is difference between a Budget (Budgeted cost) and a Standard (Standard cost)

A budget usually refers to a department's or a company's projected revenues, costs, or expenses. A standard usually refers to a projected amount per unit of product, per unit of input (such as direct materials, factory overhead), or per unit of output.

Variances

Variance analysis involves breaking down the total variance to explain:

1. How much of it is caused by the usage of resources differing from the standard
2. How much is caused by cost of resources differing from the standard

Variances are calculated for each items/effort involved in making of a product (price, quantity, labore, machine). Most popular are Price Variance, Quantity Variance, Efficiency Variances (Labor and Machine). Variances are calculated from Standard input/output and Actual input/output

Regards,

Mudasser