A flexible budget is a dynamic budget. It is a budget which is designed to change in accordance with the level of activity. It is a budget that adjusts or flexes for changes in the volume of activity. Actual output may differ from the budgeted output so it is necessary to modify the budget on the basis of changed output. To arrange a flexible budget, you need to have a master budget, actually understand cost behavior, and know the actual volume of goods produced and sold.
The steps needed to construct a flexible budget are:
- Identify all fixed costs and segregate them in the budget model.
- Determine the extent to which all variable costs change as activity measures change.
- Enter actual activity measures into the model after an accounting period has been completed.
- Enter the resulting flexible budget for the completed period into the accounting system for comparison to actual expenses.
Though the flex budget is a good tool, it can be difficult to formulate and administer. It cannot be preloaded into the accounting software for comparison to the financial statements.
