![]() Thus, if sales differ from what is budgeted, then comparing actual costs to budgeted costs may not provide a clear indicator of how well the company is meeting its targets. ![]() However, this comparison may be like comparing apples to oranges because variable costs should follow production, which should follow sales. Actual results are compared to the static budget numbers as one means to evaluate company performance. The master budget, and all the budgets included in the master budget, are examples of static budgets. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license) Static versus Flexible BudgetsĪ static budget is one that is prepared based on a single level of output for a given period. The expenses that do not change are the fixed expenses, as shown in Figure 7.23.įigure 7.23 Flexible Budget for Big Bad Bikes. It also looked at the effect a change in price would have if the number of units remained the same. Big Bad Bikes developed a flexible budget that shows the change in income and expenses as the number of units changes. Its estimations of sales and sales price will likely change as the product takes hold and customers purchase it. The company knows its variable costs per unit and knows it is introducing its new product to the marketplace. Flexible budgets are prepared at each analysis period (usually monthly), rather than in advance, since the idea is to compare the operating income to the expenses deemed appropriate at the actual production level.īig Bad Bikes is planning to use a flexible budget when they begin making trainers. This flexibility allows management to estimate what the budgeted numbers would look like at various levels of sales. A flexible budget flexes the static budget for each anticipated level of production. Flexible BudgetsĪ flexible budget is one based on different volumes of sales. But is this bad? To account for actual sales and expenses differing from budgeted sales and expenses, companies will often create flexible budgets to allow budgets to fluctuate with future demand. Everything starts with the estimated sales, but what happens if the sales are more or less than expected? How does this affect the budget? What adjustments does a company have to make in order to compare the actual numbers to budgeted numbers when evaluating results? If production is higher than planned and has been increased to meet the increased sales, expenses will be over budget. ![]() A company makes a budget for the smallest time period possible so that management can find and adjust problems to minimize their impact on the business.
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