Flexible Budgets
In those industries where the pattern of demand is stable, a fixed budget may be adequate, especially where the budget period is comparatively short. In such businesses it is possible to forecast sales with a considerable degree of accuracy. There are many undertakings where stable conditions are absent. In such concerns fluctuations in output might lead to violent deviations fromd the budget. In such concerns it is usual to adopt the flexible budgetary technique. A flexible budget is a budget which is designed to change in accordance with the level of activity actually attained. If flexible.
The owner of a car knows that the more he uses it per year the more it costs him to operate it. He also knows that the more he uses his car the less its costs per running metres. The reason for this lies in the nature of the expenses, some of which are fixed while others are variable or semivariable. Insurance, taxes, registration, and garaging are fixed costs; they remain the same whether the car is operated 1,000 or 2,000 kilometers. The costs of tyres, petrol oil, and repair are variable costs and depend largely upon the kilometers driven. Obsolescence and depreciation result in a combined type of cost that, although fluctuating to some degree upon the usage of the car, is semi-variable for it does not vary directly with the usage. The cost of operating the car per kilometer depends on the number of kilometers the car is used. The mileage constitutes the basis for judging the activity of the automobile. If the owners prepares an estimate of total cross and compares his actual expanses with the budget in keeping his expenses within the allowed limits, unless he takes the mileage factor into account.
Originally, the flexible budget idea was applied principally to the control of departmental factory overhead. In recent years, however, the idea has been applied to the entire budget so that production budgets as well as selling and administrative budgets are prepared on a flexible basis. The construction of a flexible budget is identical with that of a fixed budget, except that a budget is calculated for each volume ranging from a possible 60 per cent to 100 per cent of capacity. When actual figures are available estimate previously determined for the level attained are compared with actual results, and the differences are noted. This end-of period comparison is used to measure the performance of each department head. It is this readymade method of comparison that makes the flexible budget a valuable instrument for cost control. The flexible budget assists in evaluating the effects of varying volumes of activity on profits and on cash position.
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