For example, if direct materials cost $5 per unit and a scenario anticipates 10,000 units, the budgeted direct material cost would be $50,000. Fixed costs are then added to these variable cost totals; since fixed costs remain constant within the relevant range, they are included at the same amount across all activity levels. This combination creates a budget that adjusts to reflect the specific activity level. Another concept is the “relevant range,” which defines the specific activity levels where assumed cost behaviors remain valid. Outside this range, fixed costs may change, or variable costs may not maintain a perfectly linear relationship with activity.

Even if a cost is assigned a numerical value, a monthly review of costs compared to revenue allows that number to be changed for future periods. If the factory has to use more machine hours one month, its budget should logically increase. Conversely, if it uses them for fewer hours, its budget should reflect that decline. According to this data, the monthly flexible budget would be $35,000 + $8 per MH. A static budget stays at a single amount regardless of how much activity there is. Datarails’ budgeting and forecasting software can help your team create and monitor different types ofbudgets faster and more accurately than ever before.

Flexible Budgeting: Learn the Advantages and Disadvantages!

It’s based on a set of assumptions made at the beginning of the budgeting period. It scales in response to shifts in variable costs—expanding or contracting as needed to reflect what’s actually happening in the business. Flexible budgets shine in settings where costs rise or fall in step with business activity. For SaaS companies, that often includes things like hosting fees and website infrastructure. When traffic increases—thanks to marketing efforts like webinars, ebooks, or new content—those costs naturally go up.

This type of budget provides a more comprehensive view of financial performance by considering factors beyond immediate revenue changes. A flexible budget can be used for any type of business activity, large or small. Since the company’s revenues have gone up to $110 million, the company will have a $55 million cost of goods sold as it’s 50% of the sales.

Flexible vs. static budgets

A flexible budget represents a financial plan that adapts to changes in an organization’s activity levels. Unlike a static budget, which remains fixed regardless of output, a flexible budget accounts for variations in metrics like sales volume, production units, or service hours. By adjusting revenues and expenses according to actual operations, it provides a more accurate financial benchmark for evaluating performance. This adaptability helps distinguish between spending variances caused by activity changes and those from operational inefficiencies. A flexible budget adjusts the financial plan to reflect changes in the actual level of activity, departing from a static budget’s fixed nature. Unlike a what is a flexible budget static budget, which remains unchanged regardless of production or sales volume, a flexible budget adapts its cost and revenue figures.

This type of budget incorporates changes across all areas of the business, including labor, materials, overhead, and even strategic investments. Financial forecasting software is well-suited for managing flexible budgeting. Forecasting tools can integrate with various data sources, like Xero Accounting, and spreadsheets, to collect accurate data on activity levels and costs. They enable scenario modelling to project different outcomes based on varying activity levels, ensuring adaptability in budgeting – something that is essential in flexible budgeting. The choice between the two depends on business requirements for accuracy and adaptability versus the desire for a simpler budgeting process.

Consequently, the flex budget tends to include only a small number of step costs, as well as variable costs whose fixed cost components are not fully recognized. The ability to quickly adjust a flexible budget to take into account changes in output levels or shifts in income means that a business or other entity can move quickly to meet the new circumstances. For this reason, businesses and non-profit organizations that function in somewhat volatile circumstances are very likely to employ this approach to budgeting. A company may use flexible budgets to account for the variable costs in the operation of a plant or equipment. In a nutshell, a flexible budget is a type of budget where the budgeted figures adjust based on the company’s actual revenues and expenses.

• This adaptability allows businesses to make more accurate performance evaluations and forecasts, fostering better decision-making processes.
• This budget is divided into variable cost and fixed cost components, with the variable costs being tied to the number of unit sales of the helmet.
• In contrast, a flexible budget might base its marketing expenses on a percentage of overall sales for the period.
• For example, imagine a manufacturing company where the cost of producing each unit decreases as production volumes increase due to economies of scale.
• A flexible budget, while much more time-intensive to create and maintain, offers an incredibly precise picture of your company’s performance.

• Imagine a retail store that creates a flexible budget for its monthly operating expenses.
• Limelight integrates seamlessly with leading ERP systems like NetSuite, QuickBooks, Microsoft Dynamics, and SAP.
• These advantages collectively empower a business to respond swiftly to changes, optimise resource utilisation, and make well-informed financial decisions.

Unlike a static budget, which remains fixed, a flexible budget provides different budget amounts tailored to various activity levels. This adaptability allows businesses to prepare a budget that accurately reflects expected costs and revenues across a range of potential operating scenarios. Key elements of flexible budgeting include the distinction between fixed costs and variable costs.

They allow you to plan for predictable variations without constantly revising your entire budget. Like all budgets, the flexible budget involves the establishment of line items that address each type of expense incurred for a given financial period. A limit or value is assigned to each line item, with the total amount of the budget coming to something less than the anticipated income for that same period.