Flexible_Budget

Flexible Budget ACC/220 November 4, 2011 Flexible Budget A flexible budget is exactly what it infers, flexible. A static budget is based solely on management’s predictions of fixed and variable expenses on one level of activity (Kimmel, Weygandt, & Kieso, 2003, p. 341). A flexible budget projects and incorporates budgets for several levels of activity (Kimmel, Weygandt, & Kieso, 2003, p. 343). For example, a flexible budget for a manufacturing department may choose activity levels of units projected to be produced (Kimmel, Weygandt, & Kieso, 2003, p. 343). A car rental agency may choose activity levels based on the amount of cars rented and hotels may use room occupancy for their levels (Kimmel, Weygandt, & Kieso, 2003, p. 343). The type of activity will be applicable to the business preparing the flexible budget. The flexible budget provides for an increase or decreases in projections and can tell companies whether or not they are meeting their budget guidelines and performance measures. Each level of activity will change the variable budget costs as the fixed costs will remain the same no matter what level of activity is maintained (Kimmel, Weygandt, & Kieso, 2003, p. 345). When developing and designing a flexible budget, the master budget is used for relevant information and guidance (Kimmel, Weygandt, & Kieso, 2003, p. 345). The four steps in the development process of a flexible budget. (1) Identify the activity index and the relevant range of activity, (2) Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost, (3) Identify the fixed costs, and determine the budgeted amount for each cost, and (4) Prepare the budget for selected increments of activity within the relevant range (Kimmel, Weygandt, & Kieso, 2003, p. 346). It is very important that managers choose the correct activity index by indicating the index that most effects costs of the activity chosen (Kimmel, Weygandt, & Kieso, 2003, p. 346). The increment activity choice is the judgment of the management team. Once the increment activity levels are chosen, a budget can be prepared for each activity level. The flexible budget contains a multitude of information relevant to the department it covers. For example: a manufacturing department will include the projected forecast for units to be produced, variable, and fixed costs. Variable cost will include material, labor, and utilities while fixed costs show depreciation, property taxes and supervision for the level of activity chosen (Kimmel, Weygandt, & Kieso, 2003, p. 346). The flexible budget is divided into two areas, (1) production data, and (2) cost data (Kimmel, Weygandt, & Kieso, 2003, p. 348). We must always remember that fixed costs will remain the same throughout every level of activity while variable costs should be increased proportionally to the activity increase (Kimmel, Weygandt, & Kieso, 2003, p. 344). The flexible budget is used to evaluate a manager’s performance and is based on two areas. These areas are production control and cash control. Budget evaluations are done at the end of the period the budget covers. This would be the time spent on comparing the budget figures to the actual output. If the activity level is higher than the static budget allows, the flexible budget should now be used. If comparisons are done with a static budget and the activity level increased, it may look like the manager did not do a good job. Here is where looks can be deceiving. Once the flexible budget is used to compare actual output, the financial picture could change into a more favorable light (Kimmel, Weygandt, & Kieso, 2003, p. 345). References Kimmel, P., Weygandt, J., & Kieso, D. (2003). Essentials of accounting: Tools for business decision making (2nd ed.). Hoboken, NJ: Wiley.