{Best approach} Importance Or Advantages Of Flexible Budget|Management Accounting

Flexible budget: Importance and methods of preparation and Here you can see purpose of flexible budget advantages of flexible budget over static budget flexible budget example how to calculate flexible budget
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Importance Or Advantages Of Flexible Budget|

Importance or Benefits of a Flexible Budget:

The usefulness or importance of a flexible budget is highly dependent on the accuracy of the classification of fixed, semi-fixed and variable expenditures. The important advantages of a flexible budget are:

* A flexible budget allows management to analyze the gap between actual production and expected output.

* Management can compare actual costs to actual volumes with budgeted costs at actual volume.

* The flexible budget provides a correct basis for comparing actual and forecasted costs for a real activity.

* Flexible budget helps to achieve cost control goals as it shows where the actual performance deviated from the expected performance.

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The Chartered Institute of Management Accountants in England defines a flexible budget (also referred to as a mobile-scale budget) as a budget which, recognizing the difference in behavior between fixed and variable costs in relation to fluctuations in output, Business or other variable factors As a number of employees, is designed to change appropriately with such fluctuations.

Thus, a flexible budget gives different budgeted costs for different levels of activity. A flexible budget is prepared after an intelligent classification of all expenditures between fixed, semi-variable and variable variables, as the usefulness of such a budget depends on the accuracy with which expenditures can be classified.

Flexible budgets represent the amount of expenditures that are reasonably necessary to achieve each specified level of return. In other words, quotas under a flexible budget control system serve as standards for costs at each level of production.
Advantages Of Flexible Budget|

 Importance Or Advantages Of Flexible Budget|Management Accounting

Such a budget shall be prescribed in the following cases:

1. When the level of activity during the year varies from period to period, either because of the seasonal nature of the industry or because of the change in demand.

2. When the activity is new and the demand is difficult to predict.

3. When the company suffers from a lack of a factor of production such as material, labor, production capacity, etc. The level of activity depends on the availability of such a factor.

4. When an industry is influenced by fashion changes.

5. In the event of general changes in sales.

6. When business units continue to introduce new products or frequently change the design of their products.

7. When industries are engaged in manufacturing activities to order such as shipbuilding.

Utility (or importance) of the flexible budget:

The central importance of the flexible budget is that it reflects the appropriate spending at different levels of production. Flexible budget expenditure is appropriate for comparing actual expenditures incurred with the budgeted level applicable for that particular level of activity achieved

The following points show the usefulness or the importance of the flexible budget:

1. The flexible budget provides a logical comparison of the budgeted allocations with the actual cost, ie a comparison with a comparable basis.

2. Flexible budget accounts for operational realities and streamlines the control function and profit planning. It gives a balanced perspective on the comparison. When the flexible budget is prepared, the actual cost to actual activity is compared to the budgeted cost to actual activity, that is, two things on the same basis.

3. A flexible budget recognizes the concept of variability and provides a logical comparison of expenditure with actual expenditure as a means of control.

4. With a flexible budget, it is possible to establish the budgeted cost for any activity.

5. A flexible budget is very useful for budgetary control because it corresponds to the evolution of the level of activity.

6. It is useful for evaluating the performance of department heads because their performance can be judged against the level of activity achieved by the organization.

7. The determination of costs at different levels of activity is possible because a flexible budget is prepared for various levels of activity.

8. It is useful for setting prices and for sending quotations.

In conclusion, a flexible budget is more useful, elastic and practical.

Types  flexible budgets Methods

There are three ways to prepare a flexible budget:

1. Tabular method or multi-activity method.

2. Mapping method.

3. Formula method or ratio method.mns
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