Flexible budgets in control

NotesQuizCBE

Budgetary Control

Budgetary control involves controlling costs by comparing the budget with the actual results and investigating any significant differences between the two.

Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

If this control process is to be valid and effective, it is important that the variances are calculated in a meaningful way.

One of the major concerns is to ensure that the budgeted and actual figures reflect the same activity level.

Flexible Budgets

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. 

They are prepared at the planning stage (before production starts), using marginal costing principals, as fixed costs should not change if the volume of activity changes. 

The flexible budget is more sophisticated and useful than a fixed budget, which remains at one amount regardless of the volume of activity.

For example, a firm may have prepared a fixed budget at a sales level of $100,000. 

Flexible budgets may be prepared at different activity levels 

e.g. anticipated activity 100% and also 90%, 95%, 105% and 110% activity. 

Flexible budgets can be useful but time and effort is needed to prepare them.

One advantage of flexible budgets is that they ensure resource efficiency, because during production if activity levels increase or decrease, there is a flexible budget to provide a guideline of costs at these activity levels, so that resources are still used efficiently.

NotesQuizCBE