What is a flexible budget?

The cash budget states cash inflows and outflows, expected borrowing, and expected investments, usually on a monthly basis. The ending finished goods inventory budget is necessary to complete the cost of goods sold budget and the balance sheet. This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead. Which type of budget is best for a small business that’s just starting out?

• It is also a useful planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels.
• For example, your flexible budget may have three columns that show the number of units sold, the sales price, and total revenue.
• If it used a flexible budget, the fixed portion of the cost of goods sold would still be $1 million, but the variable portion would drop to $2.7 million, since it is always 30% of revenues.
• In an unpredictable financial world, flexible budgets are helpful in manufacturing industries where costs change with a change in activity level.
• If your accounting software doesn’t have advanced budgeting capabilities, you may want to look into standalone business budgeting software like PlanGuru, MoneyGrit.
• The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%).

Small business have less revenue than large businesses and it’s even more important for them to get their costs and profits right because the risks are greater. A flexible budget, unlike a static one, gives real numbers that tells the business exactly how it’s doing and what it can do better. So I think it’s even more important for small businesses to use a flexible budget. This is the simplest and most common budget for small businesses or for quick, high-level analysis.

Best overall plan: Mint Mobile (Any 3-month plan)

Before signing up, make sure to check Visible’s coverage map to ensure you’re covered. The Build Your Own plan is particularly nice if you want to specify a data allotment per line — for example, setting what is a flexible budget data limits for a teen who just got their first phone while allowing them unlimited minutes. Tello Mobile’s plans are the cheapest we can recommend, and they offer the most customization.

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. But two months into the fiscal year, a competitor closes its doors. Suddenly, there is only one company to meet demand for widgets, resulting in actual sales of 200 units per month.

Variance Analyses: Tale of Two Coffee Shops

A flexible budget is usually designed to predict effects of changes in volume and how that affects revenues and expenses. In order to accurately predict the changes in costs, management has to identify the fixed costs and the variable costs. Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases. The original budget for selling expenses included variable and fixed expenses. To determine the flexible budget amount, the two variable costs need to be updated. The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%).

• The variable costs and fixed costs are $7,000 and $10,000, respectively.
• Accountants enter actual activity measures into the flexible budget at the end of the accounting period.
• This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.
• Though the flex budget is a good tool, it can be difficult to formulate and administer.
• Whether a flexible budget or static budget is used by a business is largely determined by the nature of the business cycle and how seasonal it may be.
• If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served?

A company wants to prepare a budget based on a scheduled activity level of 70% of the production capacity, where the number of units designed is 7000. The variable costs and fixed costs are $7,000 and $10,000, respectively. The flexible budget uses the same selling price and cost assumptions as the original budget. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement is sales units. As you can see, the flexible budget variances are zero, as they reflect the actual level of activity or output.

How Does a Flexible Budget Work?

The actual revenue the widget company is taking in has doubled—but the production costs would also go up. The flexible budget for the quarter would reflect both these things. A flexible budget is one that takes into account your actual production and revenue rather than what you originally projected. This represents your best guess at what will be spent and what will be earned. A flexible budget often uses a percentage of your projected revenue to account for variable costs rather than assigning a hard numerical value to everything. This allows for budget adjustments to occur in real-time, taking into account external factors.

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. It has been “flexed,” or adjusted, based on your real production levels. ABC Company has a budget of $10 million in revenues and a $4 million cost of goods sold.

Accounting Principles II

You can gather data for a sales estimate by surveying your sales team, analyzing past trends, or consulting with outside research firms. Once you have compiled a sales budget, you’ll need to develop a production schedule, budget for labor, materials, administration, and other costs, and calculate the cost of goods sold. Also add the capital expenditures budget and the cash-flow budget to arrive at a budgeted balance sheet. 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.

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. Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers – the budget should closely align to expectations at any number of activity levels. It is also a useful planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels. Creating a flexible budget begins with assigning all static costs a fixed monthly value, and then determining the percentage of revenue to assign to your variable costs.

How To Optimize Your Direct Marketing Budget In 2024: A 10-Part Checklist

It is unlike the static or traditional budget, which cannot be changed once created. It accurately represents expected financial outcomes in the real world by considering different scenarios and variations in income and expenses. Budget reports can be a useful tool for evaluating a manager’s effectiveness only if they contain the appropriate information.