Quick Answer: Why Is A Flexible Budget Better Than A Static Budget?

Should all unfavorable flexible budget variances be investigated?

Only unfavorable variances should be investigated, if substantial, to determine their causes.

A favorable variance of direct materials cost occurs when the actual direct materials cost incurred is more than the standard direct materials cost determined..

What is the flexible budget amount for direct labor?

Flexible-budget cost is the standard quantity allowed for the actual level of activity multiplied by the standard price per unit. Flexible-budget variances for direct material and direct labor: $80 F and $5,500 U, respectively.

What is a weakness of using a static budget?

Disadvantages of static budgets The greatest disadvantage of the static budget is its lack of flexibility. If a company establishes a budget based on a certain level of sales volume and that volume increases, it can’t allocate additional resources to keep up.

Under what circumstances would a static budget be appropriate?

A static budget model is most useful when a company has highly predictable sales and expenses that are not expected to change much through the budgeting period (such as in a monopoly situation).

What is the advantage of using a flexible budget?

The biggest advantage to a flexible budget is that it more accurately reflects the state of your finances. The alternative, static budgeting, can’t account for unexpected expenses or changing income. A flexible budget will help you track where you can adjust spending each month.

When should flexible budget be used?

For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible budget is a more useful tool when measuring a manager’s efficiency.

How do you calculate a flexible budget?

To compute the value of the flexible budget, multiply the variable cost per unit by the actual production volume. Here, the figure indicates that the variable costs of producing 125,000 should total $162,500 (125,000 units x $1.30).

What is needed to prepare a flexible budget?

How to create a flexible budgetIdentify which costs are variable and which costs are fixed. Fixed costs typically include expenses such as rent and monthly marketing costs. … Divide the budget. … Create your budget with set fixed costs. … Update the budget. … Input and compare.

Do fixed costs change in a flexible budget?

Preparation of a Flexible Budget. The flexible budget uses the same selling price and cost assumptions as the original budget. Variable and fixed costs do not change categories. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement is sales units.

What does a flexible budget look like?

In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. … Consequently, a more sophisticated format will also incorporate changes to many additional expenses when certain larger revenue changes occur, thereby accounting for step costs.

What are the features of flexible budget?

Main Features of Flexible BudgetThe flexible budget covers a range of activities,A flexible budget is easy to change according to variations of production and sales levels.Flexible budget facilitates performance measurement and evaluation.It takes into account the changes in the volume of activity.More items…

What is true about a static budget?

A static budget is a budget in which the amounts will not change even with significant changes in volume. In contrast to a static budget, a company’s sales department might have a flexible budget. In the flexible budget, the sales commissions expense budget would be stated as a percentage of sales.

What is a flexible budget when is it prepared?

A flexible budget is prepared after making an intelligent classification of all expenses between fixed, semi-variables and variable because the usefulness of such a budget depends upon the accuracy with which the expenses can be classified.

What is meant by zero based budgeting?

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. … Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

What are three types of flexible expenses?

There are three major types of expenses we all pay: fixed, variable, and periodic.

Is flexible or static budget more useful?

The greatest advantage that a flexible budget has over a static budget is its adaptability. In the real world, change is real and it is constant. A flexible budget can handle that reality and better position a company for the challenges of the marketplace. Fixed versus variable expenses in a flexible and static budget.

What is a flexible budget and how does it differ from a static planning budget?

A flexible budget is one that is allowed to adjust based on a change in the assumptions used to create the budget during management’s planning process. A static budget, on the other hand, remains the same even if there are significant changes from the assumptions made during planning.

What is the difference between a flexible budget and an actual budget?

A flexible budget is a budget that shows differing levels of revenue and expense, based on the amount of sales activity that actually occurs. … If actual revenues are inserted into a flexible budget model, this means that any variance will arise between budgeted and actual expenses, not revenues.

What is the purpose of a static budget?

A static budget helps to monitor expenses, sales, and revenue, which helps organizations achieve optimal financial performance. By keeping each department or division within budget, companies can remain on track with their long-term financial goals.

What is a disadvantage of a rolling budget?

A disadvantage of the rolling budget method is that business owners may end up asking their managers to spend too much of their time preparing fresh forecasts. This creates resentment if the time spent forecasting prevents the managers from completing other critical tasks.

What fixed budget?

A fixed budget is a financial plan that is not modified for variations in actual activity. … The only situations in which a fixed budget is likely to track close to actual results are when: Costs are largely fixed, so that expenses do not change as revenues fluctuate.

What is the static?

adjective Also stat·i·cal . pertaining to or characterized by a fixed or stationary condition. showing little or no change: a static concept; a static relationship. lacking movement, development, or vitality: The novel was marred by static characterizations, especially in its central figures.

Why flexible budget is better than fixed budget?

Fixed budget is inflexible and does not change with the actual volume of output achieved. Flexible budget can be suitably recasted quickly according to level of activity attained. Fixed budget assumes that conditions would remain static. Flexible budget is design to change according to changed conditions.