Flexible Budget

Oct 24, 2018 | 0 comments

Oct 24, 2018 | Miscellaneous | 0 comments

Flexible Budget

The environment for business is very dynamic and competitive thus preparing a financial plan that can alter changes in the activity level depending on the circumstance is essential for the effective daily running of the business. A flexible budget majorly acts as a performance evaluation tool (Kimmel, Weygandt & Kieso (2005). For instance, it enables comparison of planned outcomes to actual results thus allows for measurement of variation. It also allows for modification of costs when the forecast sales volume and production go beyond or fail to meet expectations due to various uncontrollable factors. A flexible budget makes an evaluation of profits easier as it employs more points of alterations and briefer timelines as well as stated by Mattessich (2003).

Besides, a flexible budget indicates the deviation of an actual financial statement from the forecast one thus enabling the manager to control costs. A flexible budget also allows for easy adaptation to changes in the business environment in that it places the business or the company in a better position to accommodate changes, make timely operational modification as well as maximize opportunities existing in the external environment as explained by Mattessich (2003).

I do not agree with the manager who asserts that flexible budgets are useful because costs are difficult to predict, and flexibility is required to change budgeted costs as input changes. This is because a flexible budget acts as an instrument for evaluating performance thus only permits for adjustment of the static budget for actual level of output for comparison of actual expenditure to expected spending but does not allow the manager to update pricing. Besides, variations in input prices are accommodated in the flexible budget beforehand hence no need for further alteration as illustrated by Kimmel et al (2005).

References

Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2005). Principles of accounting: Tools for business decision making. New York: J. Wiley.

Mattessich, R. (2003). Accounting research and researchers of the nineteenth century and the beginning of the twentieth century: an international survey of authors, ideas and publications. Accounting, Business and Financial History. doi:10.1080/0956520032000084978