FIXED & FLEXIBLE BUDGET - Accounts and Finance for Managers

Fixed Budget

It is a budget known as constant budget, never registers the changes in the preparation of a budget, being prepared for irrespective level of output or production. This budget is mainly meant for the fixed overheads of the firm which are constant in volume irrespective level of production. The ultimate utility of the budget is to control the cost as a cost controlling measure, but the fixed budget is meaningless in having comparison with the actual performance.

Flexible Budget Example with Solution

Flexible Budget

Flexible budget is prepared for any level of production as an estimate of statement of all expenses i-e the expenses are classified into three categories viz variable, semi-variable and fixed expenses. The structure of the budget for any output is only to the tune of the actual performance achieved. This is the budget facilitates not only to have comparison in between various levels of production but also to identify the level of lowest production cost.

Utilities of the flexible budget:

  • This budget is most useful toolof analysis in studying the sales at when the circumstances are not warranting to predict
  • It is mostly suited to the seasonal business, where the sales volume is getting differed from one period to another due to changes taken place in the taste and preferences of the buyers
  • The production is being done on the basis of demand of the products in the market. The demand of the products is studied only through demand forecasting. The flexible budget is more applicable in the case of products, which are greatly finding difficult to forecast the demand
  • The budget is prepared only during the time of acute shortage of resources of production viz Men, Material and so on

Illustration

Draft a flexible budget for overhead expenses on the basis of following information and determine the overhead rates at 70% 80% and 90% plant capacity.

flexible budget for overhead expenses

flexible budget for overhead expenses

Illustration

The expenses for budgeted production of 10,000 units in a factory are furnished below

expenses for budgeted production

Prepare a budget for production of

  1. 8,000 units
  2. 6,000 units
  3. Calculate the cost per unit at both levels

Assume that administration expenses are fixed for all level of production

administration expenses

Illustration

From the following information relating to 1963 and conditions expected to prevail in 1964, prepare a budget for 1964:
budget

budget

Budget for the year 1964


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