Analysis of Fixed and Flexible Budgets

This article provides an analysis of fixed and flexible budgets, including examples and advantages and disadvantages of each. It also discusses the importance of budget variance.

MANAGEMENT
ACCOUNTING

TASK 3
Analysis of fixed and flexible budgets.
Fixed budget- The term fixed budget can be defined as a type of budget whose financial
activities are not affected due to change in volume of production or sales (Schilling and Werners,
2016). This budget is suitable for those business entities in which activities are estimated to
remain constant in long time period. Herein, below an example of fixed budget is demonstrated
in such manner:
Example of Fixed budget
Particulars Budgeted Actual Variance
Sales units 1000 1200 200A
Production units 1300 1250 50A
In £ In £ In £
Sales revenues 10000 11500 1500F
Labour costs 2600 2125 475F
Material costs 1300 1040 260F
Overheads 1950 2200 250A
Profit 4150 6135 1985F
Advantages and disadvantages:
Advantages Disadvantages
One of the key benefit of this budget is that it
is easy to use and implement.
Lack of flexibility is a key drawback of this
budget in the case when sales changes.
It helps to companies in finding the aspects in
which they are overestimating or
underestimating its income and expenses.
In the case when company is identifying
underperforming areas then they can not make
modifications in budgeted activities.

Flexible budget- This budget has completely different features compare to fixed budget. It is a
budget that can be modified by users as accordance of change in sales volume (Hladika, 2015).
This budget play a key role in the case when dramatic changes happen in sales outputs. Herein,
below example of a flexible budget is demonstrated in such manner:
Particulars Budgeted Actual Variances
Production (Units) 125000 125000
In £ In £ In £
Variable cost:
Indirect material 62500 60000 2500F
Indirect labour 50000 45000 5000F
Utilities 50000 45000 5000F
Total variable costs 162500 150000
Fixed costs:
Supervisory salaries 100000 105000 5000A
Rent 80000 80000 -
Depreciation 20000 20000 -
Total fixed cost 200000 205000
Total overheads 362500 355000 7500F
Advantages and disadvantages:
Advantages Disadvantages
This budget is beneficial in order to assess
performance of different department heads.
This budget is not suitable in the businesses
wherein financial transactions are done on a
regular basis. It is so because employees can
make modification in order to hide deficiency.
Along with, it controls different overheads. It consumes too much time and cost in

preparation.
Importance of budget variance-
The budget variance has below mentioned importance in context of businesses that are as
follows:
 It is beneficial for budgeter in order to get more realistic picture for futuristic time period.
 Analysis of variability allows a company to be proactive in meeting its business goals,
helps to recognize and minimize potential risks that ultimately build confidence among
members of the team to achieve what is expected (Biza, Kapingura and Tsegaye, 2015).
 The financial heads collect information that they need to know the reasons for
manageable and unpredictable variances with the help of variance analysis.

REFERENCES
Books and journals:
Schilling, A. and Werners, B., 2016. Optimizing information security investments with limited
budget. In Operations Research Proceedings 2014. (pp. 493-499). Springer, Cham.
Hladika, M., 2015. Flexible budget as a basis for control of performance objectives and
evaluation of management efficiency. Računovodstvo i financije. 61(12). pp.46-50.
Biza, R. A., Kapingura, F .M. and Tsegaye, A., 2015. Do budget deficits crowd out private
investment? An analysis of the South African economy. International Journal of
Economic Policy in Emerging Economies. 8(1). pp.52-76.