Friday, August 15, 2014

Management Accounting - Fixed and Flexible Budget

Fixed Budget and Flexible Budget
Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.
Fixed Budget:  A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for each level of alternative production levels or volumes.

Fixed Budget
Flexible Budget
It does not change with actual volume of activity achieved. Thus it is known as rigid or inflexible budget.
It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.
It operates on one level of activity and under one set of conditions. It assumes that there will be no change in the prevailing conditions, which is unrealistic.
It consists of various budgets for different levels of activity.
Here as all costs like - fixed, variable and semi-variable are related to only one level of activity. So variance analysis does not give useful information.
Here analysis of variance provides useful information as each cost is analysed according to its behaviour.

If the budgeted and actual activity levels differ significantly, then the aspects like cost ascertainment and price fixation do not give a correct picture.
Flexible budgeting at different levels of activity facilitates the ascertainment of cost, fixation of selling price and tendering of quotations.
Comparison of actual performance with budgeted targets will be meaningless specially when there is a difference between the two activity levels.
It provides a meaningful basis of comparison of the actual performance with the budgeted targets.