Question

What is the difference between a static and flexible Budget? How are flexible budgets prepared?

Answer 1

Answer

• Static Budget is prepared for a PLANNED level of activity that was budgeted when budgets were prepared.
  For example, a company estimated that it will produce and sold 10,000 units in coming year. Now, this company will plan its budget on the basis of these 10,000 PLANNED units. This budget will be termed as Static Budget.
  Static Budgets are also prepared ONLY for ONE LEVEL of ACTIVITY.
• Flexible Budgets can be prepared for VARIOUS LEVEL of ACTIVITIES (say 10,000 units, 12000 units, 8000 units). Usually these are prepared for ACTUAL no. of units produced and sold and considering the budgeted rate. Hence, here Budgeted rates are used with actual quantity.
• Preparation of Flexible Budget:
  >Actual units or actual level of activity is considered (not planned or budgeted units)
  >Rates used are BUDGETED rates (budgeted selling price, budgeted variable cost per unit, budgeted fixed cost).
  >Flexible Budget revenue =actual units sold x Budgeted selling price.
  >Flexible Budget Variable cost = actual units x Budgeted variable cost per unit
  >Flexible Budget Fixed cost = Budgeted Fixed cost.