The purpose of Flexible budget is to:

 

 

 

 

c) Compare actual and budgeted results at various level of activity d) Make the annual budget process more efficient  

 

 

The purpose of flexible budget is to compare actual and budgeted results at virtually every level of production. 

Separate between fixed and variable cost , Compare between budget and actual result in different activity level & make budget more flexible

a) provide management to relaxed in their budget

Correct Answer is :

 

c) Compare actual and budgeted results at various level of activity 

C AND D

What is a flexible budget? A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity.Assume that a manufacturer determines that its cost of electricity and supplies for the factory are approximately $10 per machine hour (MH). It also knows that the factory supervision, depreciation, and other fixed costs are approximately $40,000 per month. Typically, the production equipment operates between 4,000 and 7,000 hours per month. Based on this information, the flexible budget for each month would be $40,000 + $10 per MH.Now let's illustrate the flexible budget by using some data. If the production equipment is required to operate for 5,000 hours during January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in February for 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March requires only 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH).If the plant manager is required to use more machine hours, it is logical to increase the plant manager's budget for the additional cost of electricity and supplies. The manager's budget should also decrease when the need to operate the equipment is reduced. In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget.

You need to plan your company’s operational activities properly. But you can’t efficiently plan activities such as purchasing, hiring and overall management activities until you have an idea of your production or sales volume. Budgeting is a method or technique used for forecasting production and sales volume. The effectiveness of your planned daily operational activities largely depends on how accurately you have made these forecasts.

  Adjustment for Predictions

When you prepare a static or fixed budget, you assume that you can predetermine sales and production quantities. Because of various factors beyond your control, however, these numbers hardly turn out to be as predicted. You therefore need to adopt a dynamic budget that you can tailor to any level of activity within the relevant range. A flexible budget allows you to make adjustments when these activities go beyond or don’t meet expectations.

Adapting Change

The business environment around you changes rapidly; therefore, you must adapt to these changes to make your business a success story. Using a flexible budget places you in a better position to accommodate these changes, make timely operational adjustments and take the greatest benefits from opportunities that exist in external environments. For example, if you run a shipping and courier service, you may notice the increasing cost of gasoline and that travel expenses are over budget. If you use a flexible budget approach, you could name alternatives and set them in place to lessen the cost of these increases.

Control and Evaluation

If you find a change in your sales or production volume, you can reorganize your fund allocation based on changed circumstances. Thus, a flexible budget gives you more control during the budget period. A flexible budget also enables you to control cost, because it shows where the actual performance deviated from the planned performance. Evaluations of profits also are simpler because a flexible budget uses more points of change and shorter timelines.

Inflation and Variance

It’s likely that you’ll face variations in the cost of materials, selling price, wages and production overhead. You need to take care of these variations and make necessary adjustments. Since these variations could have a decisive role in your company’s operational activities, you need to use a flexible budget, which enables you to measure these variations using variance analysis. A variance analysis simply compares planned outcomes to actual results.