Question

When would it make sense to use a flexible budget as compared to a forecast budget?

Answer 1

A flexible budget is a budget, which by recognising the difference between fixed, semi-variable and variable costs, is designed to change in relation to level of activity whereas forecast budget is a budget designed to remain unchanged irrespective of the level of activity actually attained.

The circumstances where it would be sensible to use flexible budget as compared to forecast budget are given as hereunder:-

1. Where there is seasonal fluctuations in sales and/or production.

2. In case of introduction of new products, product designs and versions on a frequent basis.

3. In industries which are engaged in make-to-order business like shipbilding.

4. In respect of industries which are influenced by changes in fashion.

5. Where there is general change in sales.

6. Where there is difficulty to accurately forecast the demand of a product in case of a new business venture.

7. In case of labour intensive industry where the production of the firm is dependent upon the availability of labour.

8. Where the business is dependent upon the mercy of nature, and environment is uncertain.

Thus, in respect of above few circumstances it would be sensible to use flexible budget as comapared to forecast budget.