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Flexible Budget

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1 Professor W. F. BENTZ Flexible Budgeting: Activity Rates

FLEXIBLE BUDGETING

Definition:--A flexible budget is a budget that is a function of one or more levels of activity. Thus, the budget depends on one or more measures of activity volume rather than being fixed in amount.

Purpose:--The purpose of a flexible budget is to develop an estimate or estimates of cost for one or more levels of activity. Activity levels are typically measured in terms of activity inputs, levels, or outputs. Such a budget is flexible in the sense that it depends upon a specified level of activity volume. Acquisition budgets focus on the costs to be incurred to acquire actual or planned levels of resources. Labor budgets, purchasing plans, and similar budgets are resource acquisition oriented. Activity budgets focus on the resources that should be required to maintain activities at specified levels based on expected or desired levels of efficiency. Production budgets focus on the resources that would be required to produce a specified set of products and services. Like activity budgets, production budgets are necessarily based on assumed levels of efficiency. The idea of a flexible budget is applicable to all three types of budgets.

Temporal issues:--Flexible budgets can be used as ex-ante forecasts of total cost for various levels of activity volume. Or they can be used as ex-post standards of the costs that should have been incurred for various levels of activity volume (measured in terms of input, activity, or output levels).

Context:--Flexible budgets are used in a wide variety of circumstances. Such budgets are utilized in not-for-profit organizations as well as business firms, for a variety of activities including administrative and service tasks as well as production activities. Flexible budgets can be used even when there is no functional…...

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