ACC 543 - Managerial Accounting and Legal Aspects of Business
In today’s business, a flexible budget helps plan for the future. This tool compiles expense, revenue, production, and cost data. The data produced from the flexible budget provides an organization with a tool for performance evaluation. This can assist management in determining the most profitable sales and production levels, in addition to determining fixed and variable costs. Examining how the flexible budget relates to fixed and variable costs as well as analyzing the correlation between the static and flexible budget leads to cost-volume-profit analysis.
Static and Flexible Budgets
Static and flexible budgets are planning and performance evaluation tools. The static budget and flexible budget have similarities and differences. The static budget, also known as the master budget, is the budget determined before the start of a given period. The basis for the static budget is the organization’s planned level of output (Edmonds et al., 2007). Any differences between the planned output level and actual output levels are variances. Flexible budgets use standard amounts and fixed costs to revenues and costs that the organization is expecting at different volume levels (Edmonds et al., 2007). Contrarily, the static budget “remains unchanged even if the actual volume of activity differs from the planned volume” (Edmonds et al., 2007, p. 1062). Another key difference between the static budget and flexible budget, as discussed by Dennis Caplan, is that determination of the flexible budget is at the end of the period, whereas, preparation of the static budget is at the beginning of the period (Caplan, 2007).
Fixed and Variable Costs in a Flexible Budget
The relationship between fixed and variable costs is the same in a static budget and flexible budget. “Static and flexible budgets use the same per unit standard...