EXPLAIN FLEXIBLE BUDGETING

A flexible budget is defined as a budget which by recognizing the difference between fixed,semi variable,variable cost is designed to change in relation to the level of activity attained. A flexible budget is a series of static budget for different levels of activity.

-A flexible budget is defined as a budget which by recognizing the difference between fixed,semi variable,variable cost is designed to change in relation to the level of activity attained. -A flexible budget is a series of static budget for different levels of activity. -Such budget are especially useful for estimating and controlling factory costs and operating expenses. -It shows expected results of responsibility centre for several activity levels. -Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers - the budget should closely align to expectations at any number of activity levels. It is also a useful planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels.

**FLEXIBLE BUDGETING** A flexible budget includes formulas that adjust expenses and costs based on changes in actual incomes or other activities. So we get a budget that is fairly closely arranged with actual results. flexible budget rearranges itself based on activity levels. It is a good tool for evaluating the performance of managers. Flexible budget is also known as flex budget Thanks :)

Hie Uma, **Flexible Budget can be explained as follows :-** 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. A flexible budget calculates different expenditure levels for variable costs, depending upon changes in actual revenue. The result is a budget that varies, depending on the activity levels experienced. You input the actual revenues or other activity measures into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs.

A flexible budget is defined as a budget which by recognizing the difference between fixed,semi variable,variable cost is designed to change in relation to the level of activity attained. A flexible budget is a series of static budget for different levels of activity. Such budget are especially useful for estimating and controlling factory costs and operating expenses. It shows expected results of responsibility centre for several activity levels.

A flexible budget includes formulas that adjust expenses based on changes in actual revenue or other activities. The result is a budget that is fairly closely aligned with actual results. This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels. In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to actual revenue incurred. However, this approach ignores changes to other costs that do not change in accordance with small revenue variations. Consequently, a more sophisticated format will also incorporate changes to many additional expenses when certain larger revenue changes occur, thereby accounting for step costs. By incorporating these changes into the budget, a company will have a tool for comparing actual to budgeted performance at many levels of activity. Advantages of Flexible Budgeting::: Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers - the budget should closely align to expectations at any number of activity levels. It is also a useful planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels. Disadvantages of Flexible Budgeting::: Though the flex budget is a good tool, it can be difficult to formulate and administer. Several issues are: Many costs are not fully variable, instead having a fixed cost component that must be derived and then included in the flex budget formula. A great deal of time can be spent developing step costs, which is more time than the typical accounting staff has available, especially when in the midst of creating the more traditional static budget. Consequently, the flex budget tends to include only a small number of step costs, as well as variable costs whose fixed cost components are not fully recognized. The flexible budget model usually only works within a relatively limited revenue range; the budget analyst is unlikely to spend the time developing a more wide-ranging model if it is considered unlikely that outlier revenue amounts will be encountered. There may also be a time delay between when there is a change in revenue and when a supposedly variable cost changes. Here are several examples: Sales increase, but factory overhead costs do not increase at a similar rate, since the sales are from inventory that was produced in a prior period. Sales increase, but commissions do not increase at a similar rate, since the commissions are based on cash received, which has a 30-day time lag. Sales decline, but direct labor costs do not decline at the same rate, because management elected to retain the production staff. Given the considerable amount of time required to maintain a flexible budget, some organizations may instead opt to eliminate their budgets entirely, in favor of using short-range forecasting without the use of any types of standards (flexible or otherwise). An alternative is to run a high-level flex budget as a pilot test to see how useful the concept is, and then expand the model as necessary.