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April 18, 2007

What is a flexible budget?

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.

Assume that a manufacturer determines that its cost of electricity and supplies for the factory are approximately $10 per machine hour (MH). It also knows that the factory supervision, depreciation, and other fixed costs are approximately $40,000 per month. Typically, the production equipment operates between 4,000 and 7,000 hours per month. Based on this information, the flexible budget for each month would be $40,000 + $10 per MH.

Now let’s illustrate the flexible budget by using some data. If the production equipment is required to operate for 5,000 hours during January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in February for 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March requires only 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH).

If the plant manager is required to use more machine hours, it is logical to increase the plant manager’s budget for the additional cost of electricity and supplies. The manager’s budget should also decrease when the need to operate the equipment is reduced. In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget.

Learn more about Manufacturing Overhead.

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Comments

17 Responses to “What is a flexible budget?”

  1. aks on March 11th, 2008 2:18 am

    the matter presented by you on flexible budget is nice

  2. j on April 23rd, 2008 9:46 am

    what is a fixed budget?

  3. Ainan on August 31st, 2008 10:44 am

    I was seeking more information on flerxible budget…but here i couln’t match my expectations…..!!

  4. Dave on September 19th, 2008 10:51 am

    If flexible budget can always adjust to the changing situation, as opposed to fixed budget, how can the values within the flexible budget be any different than the actual budget?

  5. Dawn on October 5th, 2008 8:33 pm

    With a flexible budget, the adjustments are made depending on the activity level, i.e units produced or clients serviced. Utilizing a static budget does not allow for changes in the activity level. If you produce more then your labor and direct materials rates are going to be higher.

  6. Cynthia on November 20th, 2008 12:21 pm

    Flexible budget = a budget that adjust for varying rates of activity. You can think of a flexible budget as a series of static budgets for different levels of ACTIVITY

  7. OGENDO on November 27th, 2008 3:51 am

    This is good but a fairer illustration is needed.

  8. maxamed or suni on December 24th, 2008 12:34 pm

    i,m student Instituate managment i would like to seach in this web site may information about by side of knawledge

  9. christine on December 26th, 2008 10:31 am

    I am a management accounting student and will appreciate nformation on STANDARD COSTING

  10. kristine on January 29th, 2009 1:11 am

    nice definition on flexible budget…. it help me understand better…

  11. peter on April 24th, 2009 3:10 pm

    an explanation on aflexible budget vs fixed budget

  12. nasir on May 14th, 2009 12:09 pm

    shortest definition of flexible budget

  13. ayyath on June 28th, 2009 1:23 am

    FLEXIBLE BIDGET: which may frequently change according to the level of activity.

  14. ML Colley on July 3rd, 2009 12:04 pm

    Simple, short and precise. If all authorities can write this way, the mystery of finance will go away!

  15. kevin on July 4th, 2009 7:46 pm

    what is the circumstance is flexible use?

  16. hyzaw on November 7th, 2009 3:10 pm

    compare the difference between flexible and fixed budgeting?

  17. l.d. on November 19th, 2009 12:12 am

    What budgeted amounts appear on the flexible budget???

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