What Are Flexible Budgets? 4 Best Practices

Unlike a static budget, which can be prepared in anticipation of performance, a flexible budget allows you to adjust the original master budget using actual sales and/or production volume. Over time, though, your actual production, sales, and revenue will change. These changes can be due to variations such as changing inventory costs, supply chain concerns, and market conditions. You would then take your static, or master, budget and adjust the numbers based on your actual revenue.

The budget shown in Figure 7.25 illustrates the payment of interest and contains information helpful to management when determining which items should be produced if production capacity is limited. For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible budget is a more useful tool when measuring flexible budget example a manager’s efficiency. The master budget allows company directors to forecast the actions they will need to take in the upcoming quarter or year to meet their goals. While even a static budget is better than no budget at all, creating a flexible budget provides a much clearer picture of revenues and production costs. If you own an ice cream shop, you know that the height of your business will be in the warm summer months.

Example of Master Budget

The flexible budget will show different possibilities for variable expenses and revenue. Variable costs can include marketing and sales, and may also include the cost of materials, number of sales, and shipping costs. For example, if your production of widgets is 100 per month, your variable admin costs may be $200 per month. However, if your production of widgets is 200 per month, your variable admin costs would increase to $400. It is not a stringent budget that, once ready for an activity level, cannot be changed.

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Flexible budgets are useful to have when sales exceed (or underperform) expectations. The budget for capital expenditures contains budgetary figures for the large, expensive fixed assets for the business firm. This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Let’s face it  – business moves fast, and we have to be flexible for what is thrown at us.

Flexible budgets make sense

According to this data, the monthly flexible budget would be $35,000 + $8 per MH. The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month. A flexible budget is a budget or financial plan that varies according to the company’s needs. They made it flexible because the specific company’s or department’s needs do not remain static. Flexible budgets are usually prepared at each business analysis period (either monthly or quarterly), rather than in advance. The budget committee usually develops the master budget for each year, guided by the budget director, who is usually the controller of the company.

Learn how it can help your business respond to the ups and downs of the marketplace. The cash budget states cash inflows and outflows, expected borrowing, and expected investments, usually on a monthly basis. The selling and administrative https://www.bookstime.com/articles/hire-an-accountant expense budget deal with non-manufacturing costs such as freight or supplies. Often, a company’s other budgets will roll up into the master budget. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.