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Corporate practice bd |
What is Flexible Budget, Planning Budget, Static Budget, Actual Budget?
1. Flexible Budget
A Flexible Budget adjusts expenses based on changes in actual revenue or other activity levels. It allows for better variance analysis by comparing actual performance against a budget that reflects the actual level of activity.
Example:01.
ABC Manufacturing has budgeted its variable costs based on the number of units produced.
Budgeted Variable Cost per Unit: $50
Fixed Costs: $100,000
Flexible Budget for Various Production Levels:
Production Level: 1,000 Units 2,000 Units 3,000 Units
Variable Costs: $50,000 $100,000 $150,000
Fixed Costs: $100,000 $100,000 $100,000
Total Budget: $150,000 $200,000 $250,000
Planning Budget:
A Planning Budget (also known as a forecast or static budget) is prepared for a single level of activity and does not change once set. It is often used for strategic planning and longer-term financial projections.
Example:02.
ABC Corporation plans for the next fiscal year assuming a production of 2,000 units.
Estimated Sales: $500,000
Estimated Variable Costs: $100,000
Estimated Fixed Costs: $150,000
Planning Budget:
Sales: $500,000
Variable Costs: $100,000
Fixed Costs: $150,000
Total Costs: $250,000
Projected Profit: $250,000
Static Budget:
A Static Budget is a fixed budget created at the beginning of the period, based on expected levels of activity, and does not change regardless of actual activity levels. It is useful for cost control but can be less flexible in performance evaluation.
Example:03.
XYZ Company sets its static budget based on an estimated production of 1,500 units.
Estimated Sales: $300,000
Estimated Variable Costs: $75,000
Estimated Fixed Costs: $125,000
Static Budget:
Sales: $300,000
Variable Costs: $75,000
Fixed Costs: $125,000
Total Costs: $200,000
Projected Profit: $100,000
Actual Budget:
The Actual Budget reflects the actual figures achieved for sales, costs, and expenses during the period. It is used for comparison against other budgets to analyze variances.
Example:04.
XYZ Company's actual results for the period, with actual production at 1,800 units.
Actual Sales: $360,000
Actual Variable Costs: $90,000
Actual Fixed Costs: $120,000
Actual Budget:
Sales: $360,000
Variable Costs: $90,000
Fixed Costs: $120,000
Total Costs: $210,000
Actual Profit: $150,000
Summary:
Flexible Budget adjusts based on actual activity levels, offering more precise variance analysis.
Planning Budget is used for long-term strategic planning at an assumed activity level.
Static Budget is fixed and does not change with actual activity, useful for cost control.
Actual Budget represents the actual financial results, used for comparison and variance analysis.
These different budgets serve various purposes in planning, controlling, and analyzing financial performance within an organization.