Flexible Budget

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A flexible budget is a budget that adjusts to the actual level of activity, such as units produced or sold, so that actual results can be compared fairly with what costs should have been at that level.

A static budget is set for one planned level of activity. If actual activity is different, comparing actual costs with the static budget can be misleading, because variable costs naturally change with volume.

A flexible budget recalculates budgeted costs for the actual volume, using budgeted variable costs per unit and budgeted fixed costs.

For example, a company budgets for 10,000 units with variable costs of 6 per unit and fixed costs of 20,000, a total of 80,000. It actually produces 12,000 units and spends 95,000. Compared with the static budget, costs look 15,000 over. But the flexible budget for 12,000 units is 92,000, so the true overspend, after allowing for the higher volume, is only 3,000.

Flexible budgets separate the effect of volume from the effect of efficiency and price, making performance evaluation fairer. They are central to variance analysis in businesses with significant variable costs.

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