flexible Budget with only .md file format

Flexible Budget

What is a Flexible Budget?

A flexible budget is a plan that changes based on how much a business actually produces or sells. It adjusts according to real activity levels, unlike a fixed budget, which stays the same no matter what.

For example, if a factory makes more products, costs like materials will increase. If it makes fewer products, those costs will decrease. A flexible budget helps businesses plan for these changes and track their money better.

Why is a Flexible Budget Useful?

1. Adjusts to Real Activity: It changes when production or sales increase or decrease.
2. Improves Cost Tracking: Businesses can see where they are spending too much or saving money.
3. Helps Decision-Making: Managers can make better choices based on actual conditions.
4. Works for Changing Costs: Especially helpful for costs that change with activity, like raw materials or commissions.

How Does a Flexible Budget Work?

In management accounting, the flexible budget separates costs into two categories:

1. Fixed Costs: Costs that remain constant, no matter the activity level (e.g., rent, salaries).
2. Variable Costs: Costs that change directly with the level of activity (e.g., materials, commissions).

A flexible budget recalculates the total budget based on actual activity levels, leaving fixed costs unchanged and adjusting variable costs accordingly.

Frame work to be followed:

Step 1: Understand the Purpose: A flexible budget adjusts based on actual levels of activity, like production or sales, to provide a more accurate financial plan.

Step 2: Break Down the Flexible Budget into Key Components

1. Fixed Costs: Costs that stay the same regardless of activity (e.g., rent, salaries).
2. Variable Costs: Costs that change with activity (e.g., raw materials, commissions).
3. Total Costs: Formula: Total Costs = Fixed Costs + (Variable Cost Per Unit × Actual Units).

Step 3: Steps to Prepare a Flexible Budget

1. Identify Fixed Costs: List expenses that remain constant, like rent and insurance.
2. Determine Variable Costs: Calculate the cost per unit for variable expenses, like raw materials.
3. Set Activity Levels: Define possible production or sales levels (e.g., 80%, 100%, 120%).
4. Calculate Costs for Each Level: Use the formula: Total Costs = Fixed Costs + Variable Costs.

Summary

• A flexible budget adjusts to changes in sales or production levels.
• Fixed costs stay the same, but variable costs increase or decrease based on activity.
• It's useful for businesses with fluctuating activities, helping them plan and control costs.
• While it's more accurate, it requires time and good data to create and maintain.

Let us solve a question for better understanding

Draw up a flexible budget for production at 75% and 100% capacity on the basis of the following data for a 50% activity.

• Materials - 100 Rs per unit
• Labour - 60 Rs per unit
• Direct Expense - 20 Rs per unit
• Administrative expense (50% fixed) - 80000 Rs
• Selling and distribution expense (60% fixed) - 100000 Rs
• Fixed Expenses
  • Depreciation - 10000 Rs
  • Insurance - 5000 Rs

Present production (50% activity) – 1000 units

Basic Rule which will be followed:

• Rule 1 → Fixed Cost
  • Total column Remain Constant
  • Only per unit column vary
• Rule 2 → Variable Cost
  • Per unit column Remain Constant
  • Total column Vary

Flexible Budget

Date: ...

Particulars	Capacity Level
	50% (1000 units)	75% (1500 units)	100% (2000 units)
	Per Unit	Total	Per Unit
Variable Cost
Material	100	1,00,000	100
Labour	60	60,000	60
Direct Expense	20	20,000	20
Total Variable Cost (a)	180	1,80,000	180
Semi-Variable Cost
Admin Expense (50% Fixed)	40	40,000	26.67
(50% Variable)	40	40,000	40
Selling & Dist Expense
(60% Fixed)	60	60,000	40
(40% Variable)	40	40,000	40
Semi-Variable Cost (b)		1,80,000	146.67
Fixed Cost
Depreciation	10	10,000	6.67
Insurance	5	5,000	3.33
Total Fixed Cost (c)	15	15,000	10
Total cost (a+b+c)	375	3,75,000	336.67

References

• https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/budgeting1.html#:~:text=A%20flexible%20budget%20is%20a,various%20activity%20levels%20are%20considered
• https://www.netsuite.com/portal/resource/articles/financial-management/flexible-budget.shtml