A flexible budget is a budget statement that shows what the expected costs should have been for any level of output, so that the actual costs can be compared to planned costs for the output that was actually generated. In a flexible budget, the costs are separated into variable and fixed costs. The more information that is provided to explain variances in budgeted and actual amounts, the easier it is for management to make successful decisions about costs and expenses.
A flexible budget classifies budget requests by activity and estimates the benefits arising from each activity. It presents a statement of expectations for a period of time but does not present a firm commitment. It also presents the plan for only one level of activity and does not adjust to changes in the level of activity. However it presents the plan for a range of activity so that the plan can be adjusted for changes in activity levels.
Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. The information is used for planning and control purposes. The flexible budget responds to changes in activity, and performance evaluation. The flexible budget uses the same selling price and cost assumptions as the original budget.
Variable and fixed costs do not change categories. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement are sales units. Each flexible budget line will be discussed separately. In conclusion budgets are complicated and complex tools. Within a budget there are many specific budgets which have to be examined separately. Flexible budgets helps companies set up strategy to assist in predicting positive outcomes for the business.