Flexible Budget Essay

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Static Budget vs. Flexible Budget A master budget, which is based solely on the planned volume of activity, is frequently extended to a flexible budget (Edmonds, p. 1062, 2007). The master budget is often called a static budget due to its consistency in remaining unchanged in spite of the actual volume of activity differentiating from the planned volume of activity (Edmonds, p. 1062, 2007). “Flexible budgets differ from static budgets in that they show expected revenues and costs at a variety of volume levels” (Edmonds, 2007, p. 1062). In order to properly evaluate performance, a flexible budget is utilized since it evaluates the “actual volume of activity, not the planned volume of activity” (Edmonds, p. 1061, 2007). Flexible budgets are use to evaluate the volume of activity based on different levels of volume, and they flex (or change) when the volume of activity changes (Edmonds, p. 1061, 2007). Flexible Budget Lend to CVP Analysis A cost-volume-profit (CVP) analysis, analyzes the changes in cost and volume by using a company’s income statement with the contribution margin format (Edmonds, p. 932, 2007). “The contribution margin is the difference between sales revenue and variable costs” (Edmonds, 2007, p. 932). A company’s profits are adversely affected by changes in sales price, costs, and the volume of activity (Edmonds, p. 946, 2007). Therefore it is imparitive that management considers probable changes in cost and volume through the use of a CVP analysis. A CVP analysis measures fixed cost and “assumes true linearity among the CVP variables and a constant level of inventory” (Edmonds, p. 946, 2007). Although flexible budgets are based on different levels of volume and change with the changes in activity, flexible budgets lends itself to CVP analysis due its ability of measuring changes in cost and volume. With the use of a flexible budget, a
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