What Is Flexible Budget ?
Usually, a firm prepares a budget for a single expected level of activity such as production or sale. It does not change the budget even if the level of activity differs from the expected. Such a budget is called static or fixed budget. Since the actual level of activity may significantly differ from the expected, the static budget has limited use for cost control purpose. Besides, it also fails to analyze the reasons for the difference between the actual and expected levels of activity. It also causes difficulty in forecasting the operation for the firms dealing in continuous and job order production. Therefore, another type of budgeting was developed to overcome the limitations of static budget, which is known as flexible budgeting. The flexible budgeting can cope with the changing business situation of the firm.
A flexible budget is a set of alternative budgets for different expected levels of activities i.e. production and sales on the basis of a cost-volume-profit relationship, that requires an intelligent classification of all expenses into fixed or semi-fixed, variable or semi-variable. It is a restatement of the master budget for the achieved level of activities. The flexible budget is also called a variable budget, which shows the budgeted revenue, costs and profits for different levels of business activities rather than being based on only one level of activity. Thus, flexible budget can be used to evaluate the efficiency of a department throughout the business even if the actual level of business activity differs from the management's original estimates.
Therefore, flexible budget is a kind of budget, which recognizes the variability of costs and incorporates any change in levels of activities by preparing budgets for different levels of activity.