flexible budgeting definition

Better yet, when you have real-time budget visibility, you can forecast or update your budget (as needed) and see those updates reflected on other key metrics that matter to your business. For SaaS companies, flexible budgeting relates more to the cost of revenue — the actual costs for creating and delivering a product/service to customers. The cost of revenue involves hosting fees, service and cloud fees, and website development.

Also, temporary staff or additional employees needed for overtime during busy times are best budgeted using a flexible budget versus a static one. A flexible budget is an adjustable budget that companies create for different levels of activity, i.e., different output levels, revenues, or expenses for a single budgeting period. The original budget assumed 17,000 Pickup Trucks would be sold at $15 each.

Optimal Usability in Variable Cost Environments

If 5,000 machine hours were necessary for the month of January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the machine hours in February are 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March has 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). For costs that vary with volume https://business-accounting.net/accounting-vs-law-whats-the-difference/ 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. (d) Although flexed budgets tend to maintain fixed costs at the same level whatever the level of output/sales, very often fixed costs are actually fixed only over a relevant output range.

flexible budgeting definition

The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%). These are added to the fixed costs of $12,500 to get the flexible budget amount of $24,750. In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to actual revenue incurred. However, this approach ignores changes to other costs that do not change in accordance with small revenue variations.

Pandemic Budget: 70% Capacity

The budget report is used by management to identify the sales or expenses whose amounts are not what were expected so management can find out why the variances occurred. By understanding the variances, management can decide whether any action is needed. Favorable variances are usually positive amounts, and unfavorable variances are usually negative amounts. Some textbooks show budget reports with “F” for favorable and “U” for unfavorable after the variances to further highlight the type of variance being reported. Revenue variance is the difference between what revenue should have been for the actual production activity and what the actual revenue you take in is.

  • Flexible budget is a budget which, by recognizing the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover, or other variable factors, etc.
  • The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable.
  • Even if a cost is assigned a numerical value, a monthly review of costs compared to revenue allows that number to be changed for future periods.
  • The lack of a variance indicates that costs in total (materials, labor, and overhead) were the same as planned.

The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable. In financial planning and analysis, adapting and responding to changing circumstances is critical for organizations seeking to optimize their budgeting processes. By incorporating a dynamic and responsive approach to budgeting, companies can better align their financial plans with the ever-evolving landscape where they operate. (c) The method of determining the fixed and variable elements of costs is often arbitrary and hence the flexed cost bear little relation to the correct budgeted cost for the flexed level of activity. Your flexible budget would then look at revenue, based on both units sold and sales price. For example, your flexible budget may have three columns that show the number of units sold, the sales price, and total revenue.

Original Budget: 100% Capacity

Insufficient historical data or unreliable forecasts can compromise the budget’s reliability. Obtaining and maintaining accurate data can be arduous, particularly in dynamic A CPAs Perspective: Why You Should or Shouldnt Work with a Startup business environments. Additionally, the increased administrative burden of monitoring, data collection, and adjustments may impact finance and accounting teams.

  • So if the initial static budget called for 25% to be spent on marketing, the flexible budget will maintain that same percentage for marketing whether the budget increases or decreases.
  • Each unit will bring in a net profit of $50, so the net profit per month will be 100 X 50, or $5,000.
  • The result is a budget that is fairly closely aligned with actual results.
  • Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams.

Due to its flexibility and response to marketplace and company changes, flexible budgeting requires ample attention. The disadvantages of flexible budgeting include its time-consuming nature, lack of accuracy, and delays in processing. Which is why companies have moved away from traditional static budgeting to more flexible Fund Accounting 101: Basics & Unique Approach for Nonprofits budgeting strategies. A flexible budget lets you adjust to global trends and economic changes rather than trying to anticipate when those will happen (and likewise brace for their impact). Flexible budgeting is a dynamic budgeting model that allows you to adjust to changes in costs and revenue in real time.

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