Flexible Budget

Essay by nunyerbusiness November 2008

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Flexible Budget

1. The flexible budget is a performance evaluation tool. A flexible budget adjusts the static budget for the actual level of output. The flexible budget asks the question: "If I had known at the beginning of the period what my output volume (units produced or units sold) would be, what would my budget have looked like?"

2. The steps to developing a flexible budget are:

Step 1: Identify the activity index and the relevant range of activity. The activity index is direct labor hours.

Step 2: Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost. There are three variable costs. The variable cost per unit is found by dividing each total budgeted cost by the direct labor hours used in preparing the master budget

Step 3: Identify the fixed costs, and determine the budgeted amount for each cost.

There are three fixed costs. Since Fox desires monthly budget data, the budgeted amount is found by dividing each annual budgeted cost by 12.

Step 4: Prepare the budget for selected increments of activity within the relevant range.

3. The information found on a flexible budget report are things such as fixed costs, variable costs times the activity which is equal to the total budget costs. The flexible budget report consists of two sections: (1) production data for a selected activity index, such as direct labor hours, and (2) cost data for variable and fixed costs. The report provides a basis for evaluating a manager's performance in two areas: production control and cost control. The report clearly provides a reliable basis.

4. The flexible budget responds to changes in activity, and may provide a better tool for performance evaluation. It is driven by the expected cost behavior. Fixed...