Posted in Finance, Accounting and Economics Terms, Total Reads: 1083
Definition: Flexible Budget
A flexible budget is defined as a budget that adjusts or flex for modify according with respect to change in the volume of activity. The flexible budget is further complicated and helpful than a stationary budget, which vestiges at one amount in spite of of the amount of activity.
Assume that a producer determines that its rate of electricity and provisions for the factory are roughly $10 per machine hour (MH). In addition the owner knows that the factory management, depreciation, and supplementary fixed costs are just about $40,000 per month. Characteristically, the manufacture equipment operates amid 4,000 and 7,000 hours per month. Based on this information of the company, the flexible budget for each month would be $40,000 + $10 for every MH.
Now let’s demonstrate the flexible budget by means of some data. If the manufacture equipment is essential to operate for 5,000 hours throughout January, the flexible budget in favor of January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the gear is required to function in February for 6,300 hours, after that the flexible budget designed for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March necessitate only 4,100 machine hours, the flexible budget intended for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH).
If the plant manager is obligatory to use additional machine hours, it is rational to boost the plant manager’s budget for the supplementary cost of electricity and provisions. The manager’s budget is supposed to also diminish when the requirement to operate the gear is reduced. In short, the flexible budget gives a better chance for preparation and controlling than does a stationary budget.