A flexible budget is a budget that takes into account changes in sales volume and other cost driver activities.
The budget incorporates the effects on each cost and revenue as a result of the change in activity. It determines the variability of the cost along with the level of activity, which will be then used as a control tool. The aim of this budget is to control the cost.
The flexible budget is designed to adjust the cost levels according to changes in the actual level of activity. Flexible budgets are mainly used to exercise control over business activities.
Advantages of flexible budget
- In a flexible budget, all possible volume of output or level of activity can be covered.
- Overhead costs are analyzed into fixed variable and semi-variable costs.
- Expenditure can be forecasted at different levels of activity.
- It facilitates at all times related factors can be compared, which essential for intelligent decisions are making.
- A flexible budget can be prepared with standard costing or without standard costing depending upon what the company opts for.
- A flexible budget facilitates ascertainment of costs at different levels of activity, price fixation, placing tenders and quotations.
- It helps in assessing the performance of all departmental heads as the same can be judged by terms of the level of activity attained by the business