What are the differences between fixed and flexible budgets? (2024)

FAQs

What are the differences between fixed and flexible budgets? ›

A Flexible Budget is a budget that changes based on how much work a business does or how much it sells. It is different from a fixed budget, which stays the same no matter what happens in the business.

Critical differences between flexible and fixed budget

A flexible budget is a financial plan that varies based on activity level or production units. A fixed or static budget is a financial plan that does not change due to activity or output level.

Unlike a static budget, a flexible budget changes or fluctuates with changes in sales, production volumes, or business activity. A flexible budget might be used, for example, if additional raw materials are needed as production volumes increase due to seasonality in sales.

While a static budget is the same throughout a particular period and doesn't take seasonality or changes in sales into account, flex budgets fluctuate with sales, production, and other business activities.

A flexible budget is the planning budget forecasted using the actual level of activity instead of the planned level of activity. The flexible budget uses the same cost formulas as the planning budget but is prepared using the actual sales quantity as the activity driver.

Fixed expenses generally cost the same amount each month (such as rent, mortgage payments, or car payments), while variable expenses change from month to month (dining out, medical expenses, groceries, or anything you buy from a store).

For example, let's say a company determines it will spend $500,000 on marketing for the year. This amount will remain the same under a fixed budget, whether the company surpasses its sales goals or fails to meet them. One advantage of a fixed budget is its simplicity, as it can be easier to create and understand.

Example of a Flexible Budget

Let's say a restaurant has a fixed budget of $10,000 for food expenses for the month, which is based on an expected number of customers served. However, the restaurant experiences a significant increase in customer traffic during a particular week, resulting in higher food costs.

Fixed costs on a budget are costs that never change. Varying costs are costs that can change. An example of a flexible budget would be a business whose rent is always the same (a fixed cost) but whose inventory costs fluctuate (a varying cost) based on sales.

In any budget, the difference between the actual results and the budgeted amount is known as the variance. In a flexible budget, the variance is often split into two categories: the flexible variance and the volume variance.

What is the difference between flexible budget and actual results? ›

The flexible budgeting approach helps to narrow the gap between actual results and standards due to activity level changes. Typically, static budgets considered a fixed cost and set targets to achieve those results within the available resources. However, budgets are planned before actual production begins.

Flexible budget helps in planning by preparing a series of budgets based on different volumes of activity. A functional budget also known as departmental budget is one that relates to any of the functions or departments of an organization.

A flexible budget is useful for measuring the performance and efficiency of the business, as it compares the actual results with the budgeted results based on the same level of activity. A flexible budget can also help the business adapt to changing market conditions and customer demand.

A fixed budget is like a set spending plan – it stays the same no matter what. A flexible budget, on the other hand, adjusts to your income and expenses, like a roadmap that can change course.

The formula for activity variance is: s2=[(b−a)/6]2, where b is the most pessimistic time and a is the most optimistic The formula for project variance is: Suppose our critical path had four activities with the following variances: Activity A: 1.78 Activity B: 4.00 Activity C: 0.69 Activity D: 1.00 1.

Fixed costs are expenses that remain the same no matter how much a company produces, such as rent, property tax, insurance, and depreciation. Variable costs are any expenses that change based on how much a company produces and sells, such as labor, utility expenses, commissions, and raw materials.

Flexible budgets are essentially budgets that can be adjusted depending upon revenue and cost changes throughout the fiscal year, accounting for expected unpredictability. Companies first account for the fixed costs they expect, or at least costs that they don't expect to change as the year progresses.

The key difference between a flexed budget and a rolling budget, is that a flexed budget adjusts the volumes to actual activity and keeps the budget cost structure, while a rolling budget reassesses both volumes and costs to provide more realistic estimates based on more up-to date information.