Why is a static budget less useful than a flexible budget?

Why does a flexible budget need to be prepared when comparing to actual results?

Flexible budgets

At the end of the period, the actual level of activity as well as the actual financial results are known. If the planned budgeted activity is different than the actual activity, the planning budget cannot be used to evaluate performance during the period. Instead, a flexible budget must be prepared.

What is flexible budget and its advantages and disadvantages?

The greatest advantage that a flexible budget has over a static budget is its adaptability. In the real world, change is real and it is constant. A flexible budget can handle that reality and better position a company for the challenges of the marketplace. Fixed versus variable expenses in a flexible and static budget.

Why a flexible budget may be more effective than a static budget?

A flexible budget, also known as a variance budget, is a financial plan that adjusts according to a company's revenue, expenses, or production levels. It allows a business to adjust the budget based on volume levels or operational activities, adjusting to the variations in costs.

What are the 4 steps in flexible budgets?

A flexible budget is one based on different volumes of sales. A flexible budget flexes the static budget for each anticipated level of production. This flexibility allows management to estimate what the budgeted numbers would look like at various levels of sales.

How do you make a budget flexible?

A flexible budget is the planning budget forecasted using the actual level of activity instead of the planned level of activity. The flexible budget uses the same cost formulas as the planning budget but is prepared using the actual sales quantity as the activity driver.

What is a flexible budget also known as?

Answer. Cash budget is an estimation of the cash inflows and outflows, which can be done either for business or individual. On the other hand, a flexible budget is one which varies with the level of activity (as variable costs for a firm vary during given period).

What is the main purpose of a flexible budget for managers?

The statement is TRUE.

A flexible budget differs from the static planning budget because the budgeted expectations for revenue and variable costs are determined using the budgeted per-unit values and the actual activity level.

What is the difference between planning budget and flexible budget?

Flexible budgets adapt to changes in activity levels, allowing for a dynamic performance evaluation. By comparing actual results with flexible budget benchmarks based on the actual activity achieved, you can assess variances and identify areas where performance deviates from targets.

What is the difference between cash budget and flexible budget?

Organizations such as restaurants, manufacturing firms and even hotels use flexible budgets because they react rapidly to keep the organization's business profitable. It enables these businesses or organizations to meet the evolving daily needs of the company's business operations.

Is a flexible budget true or false?

It should be well-planned and practical

It should focus on the goal of the enterprise. A well-designed and practical budget is always workable. It should include all sorts of long and short-term plans and expenses with a practical approach.

How do you analyze a flexible budget?

Help employees understand the benefits of being involved in budgeting—for example, ensuring they have the resources they need to get their jobs done. Understand, and help employees understand, the organization's goals. No budget can be effective if it isn't based on reality.

How flexible budgets are used to evaluate performance?

Lack of flexibility: The most glaring limitation of a static budget is its inability to adapt to changes in business conditions. Once set, it remains the same, even if your revenues or expenses change substantially.

Who uses a flexible budget?

Answer and Explanation: A disadvantage of static budgets is that they (c.) do not show possible changes in underlying activity levels. The static budget is intended to be fixed and unchanging for the duration of the period, regardless of fluctuations that may affect outcomes.

What are the essential of an effective budgeting?

The flexible budget can be categorized into three different types. These include the basic flexible budget, intermediate flexible budget, and the advanced flexible budget.

Why should budgets be communicated to all employees?

For example, a flexible budget model is designed where the price per unit is expected to be $100. In the most recent month, 800 units are sold and the actual price per unit sold is $102. This means there is a favorable flexible budget variance related to revenue of $1,600 (calculated as 800 units x $2 per unit).

What is a disadvantage of static budgets?

Creating a second, flexible budget allows a company to evaluate its actual performance during the static budget period. Variances or differences in the actual budget give a small business important information about performance elements such as overhead costs and profit.

What is a major disadvantage of a static budget?

In conclusion, the key differentiator between static and flexible budgets lies in their adaptability to changing activity levels. Flexible budgets empower organizations to control costs effectively by synchronizing expenses with fluctuations in business activity.

What are the two types of flexible budget?

One of the main advantages of a fixed budget is its simplicity and ease of preparation. Since it is based on a single level of activity, it is straightforward to estimate expenses and revenues. It provides a clear target for financial performance and can serve as a benchmark for comparison.

What is an example of a flexible budget variance?

Answer and Explanation:

Master budget and the Flexible budget differs on the basis of their planning. The Flexible budget uses different level of activities or production while the Master budget pertains to only one level of activity.

Why do we need both flexible budgeting and variance analysis?

a) A flexible budget is prepared to understand the impact of change in activity levels on revenues, costs, and profit figures and not when management cannot agree on objectives for the company.

What is the conclusion of flexible budgeting?

A flexible budget can be prepared for any level of activity. The advantage to a flexible budget is we can create a budget based on the ACTUAL level of production to give us a clearer picture of our results by comparing the flexible budget to actual results.

What are the advantages of a fixed budget?

An accurate performance assessment: Flexible budgeting allows for adjustments based on actual activity levels, providing a more accurate comparison between forecasted vs actual performance. This accuracy enhances the ability to evaluate financial performance and identify areas for improvement.

What is the difference between a flexible budget and a master budget?

A flexible budget is a financial plan that varies based on activity level or production units. A fixed or static budget is a financial plan that does not change due to activity or output level. Flexible budgets can be adjusted depending on the business necessity.

When management prepares a flexible budget?

A static budget remains fixed throughout a financial period, while a flexible budget adjusts based on actual performance. Static budgets work well when costs are stable and predictable, whereas flexible budgets are suited for industries or expenses subject to fluctuations and variations.

Is a flexible budget appropriate for any relevant level of activity?

Flexible Budgets. Unlike a static budget, a flexible budget changes or fluctuates with changes in sales, production volumes, or business activity. A flexible budget might be used, for example, if additional raw materials are needed as production volumes increase due to seasonality in sales.

Why a flexible budget can improve performance evaluations?

A flexible budget is a budget that accounts for an increase or decrease in expenses and revenue. While a standard or static budget is one figure over time, you calculate and adjust the flexible budget based on actual output and variable costs.

What is different about flexible budget?

The correct answer is d. It calculates total variable cost by multiplying actual units by budgeted variable cost per unit. Flexible budget is prepared using the actual level of units and the budgeted cost or selling price per unit.

Is static budget better than flexible budget?

A fixed budget is one that stays the same and doesn't change based on variable costs. A flexible budget, on the other hand, is a more dynamic model. Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time.

What is flexible budget and its advantages and disadvantages?

Flexible Budget Characteristics-

changes in the business conditions. ✓ Prepared in advance ✓ Prepared for various levels of activity ✓ Its nature is dynamic ✓ Concerned with a particular period of time ✓ Production possible at all levels of productions.

What happens in a flexible budget?

Flexible Budget Cons:

If your expenses aren't directly related to revenue, this budget model probably won't work for you. Creating a flexible budget is a lot of work and requires a great deal of time to develop and maintain.

Is flexible budget the same as actual budget?

Additionally, flexible budgets enable the analysis of variances, which are the differences between the actual and budgeted results. This can help to identify the effects of changes in activity or output levels, as well as the effects of changes in costs or revenues per unit of activity or output.

Which is true of a flexible budget?

Flexible budgets

At the end of the period, the actual level of activity as well as the actual financial results are known. If the planned budgeted activity is different than the actual activity, the planning budget cannot be used to evaluate performance during the period. Instead, a flexible budget must be prepared.

Is flexible budget dynamic?

A flexible budget, also known as a variance budget, is a financial plan that adjusts according to a company's revenue, expenses, or production levels. It allows a business to adjust the budget based on volume levels or operational activities, adjusting to the variations in costs.

What are the characteristics of a flexible budget?

The purpose of the flexible budget is to: allow management some latitude in meeting goals. eliminate cyclical fluctuations in production reports by ignoring variable costs. compare actual and budgeted results at virtually any level of production.

What are the disadvantages of a flexible budget?

A fixed budget is a budget that remains static irrespective of the activity level. A flexible budget is a budget that changes as per the necessity of activity level.

What are the 4 steps in flexible budgets?

What are the most important characteristics of successful budgeting to learn about for the CMA exam? To be successful, a budget must be Well-Planned, Flexible, Realistic, and Clearly Communicated.

Why might managers find a flexible budget analysis?

In summary, budgeting is critical to business success. It helps businesses track cash flow, plan for growth, prepare for emergencies, identify inefficiencies, and make informed business decisions. A good budget requires careful planning, goal-setting, and financial analysis.

Why does a flexible budget need to be prepared when comparing to actual results?

Budget controls are necessary to ensure that a government does not spend more than the amount legally appropriated by its governing body. By establishing clear spending boundaries, budget controls also promote accountability and bolster trust throughout the organization.

What is a flexible budget also known as?

A flexible budget is one that is allowed to adjust based on a change in the assumptions used to create the budget during management's planning process. A static budget, on the other hand, remains the same even if there are significant changes from the assumptions made during planning.

What is the purpose of the flexible budget quizlet?

Static budgets are also useful as a tool to set a maximum spending amount for an expense. However, there are disadvantages of static budgets, such as the inflexibility to change business performance and the inability to move budgets between company divisions.

What is fixed and flexible budget?

Disadvantages of budgeting

a budget could be inflexible, and not allow for unexpected circumstances. creating and monitoring a budget can be time consuming. budgeting could create competition and conflict between teams or departments.

What are the 4 characteristics of a good budget?

The static budget uses the original volume forecasted, while the flexible budget is updated for the actual volume. For example, if during May Year 1, the company budgeted 10,000 units, but actually sold 12,000 units, then the static budget would use 10,000 units and the flexible budget would use 12,000 units.

Why is budgeting important in an Organisation?

Static budgets are also useful as a tool to set a maximum spending amount for an expense. However, there are disadvantages of static budgets, such as the inflexibility to change business performance and the inability to move budgets between company divisions.

Why is budgetary control important?

The limitations of static budgets

Lack of flexibility: The most glaring limitation of a static budget is its inability to adapt to changes in business conditions. Once set, it remains the same, even if your revenues or expenses change substantially.

Why is a static budget less useful than a flexible budget?

Flexible Budget Variance Benefits

The information from the flexible budget is based on actual results, allowing the business to adjust the static budget for accuracy and compare results. The business compares actual line-by-line costs and profits from the flexible budget with the estimations made in the static budget.