Flexible Budget.pptx

Flexible Budget

1. Flexible Budget By : Ravindra Nath Shukla

2. Budget Any financial plan serving as an estimate of and a control over future operations. Hence, any estimate of future costs. Any systematic plan for the utilisation of manpower, material or other resources. In “A Dictionary for Accountants”, Kohler defines budget as:

3. Budget The Chartered Institute of Management Accountants, London, (terminology) defines a budget as “A plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting.”

4. Budget A budget is a precise statement of the financial and quantitative implications of the course of action that management has decided to follow in the immediate next period of time (usually a year)

5. Type of Budgets Depending upon the various bases adopted, budgets may be classified into different categories. Budgets may be classified on the basis of ( i ) the coverage or scope they encompass (ii) the capacity or efficiency to which they are related (iii) the conditions on which they are based and (iv) the periods which they cover.

6. This is clearly shown with the help of the following diagram:

7. A specimen budget report for expenses :

8. What Is A Flexible Budget? F lexible budget is a budget which by recognising different cost behaviour patterns, is designed to change as volume of output changes.

9. It is useful for both planning purposes and control purposes and is generally used to estimate  factory costs  and  operating costs . A flexible budget is much more realistic than fixed budget since it gives emphasis on cost behavior at different levels of activity. A flexible budget can be found suitable when business conditions are constantly changing. Business organization prepare flexible budget to make a clear vision about what output should be produced to achieve the targeted profit.

10. When preparing a flexible budget, managers are forced to consider the different scenarios and their responses to them. Thus, for a number of different situations, managers will have calculated their costs and revenues. If an unexpected event does occur, changing the level of activity, the management will be better prepared. These budgets are different in different levels of activities, which facilitate the ascertainment of fixation of cost, selling prices, and tendering of quotations.

11. Budgetary control   Budgetary control  is the comparison of the actual results against the budget. Where the actual level of activity is different from that expected, comparisons of actual results against a fixed budget can give misleading results.

12. Type of flexible budgets

13. The types decide the flexible budget format applicable in different scenarios. Basic Flexible Budget : The basic flexible budget is prepared, indicating how the expenses are completely in sync with the revenues generated. the intermediate type reflects the expenses beyond what is generated as revenue. The advanced budget , on the contrary, takes into consideration the expected variations and ranges of differences in expenses to be incurred. This type of budget is open to changes based on the variations in the actual cost of the different categories of expenses.

14. Applications : Flexible budgeting is desirable in the following cases: Where the level of activity during the year varies from period to period, either due to the seasonal nature of the industry or to variation in demand. Where the business is a new one and is difficult to foresee the demand. Where the undertaking is suffering from shortage of a factor of production such as materials, labour , plant capacity, etc

15. Following are the striking features of flexible budgets: ( i ) They are prepared for a range of activity instead of a single level. (ii) They provide a very dynamic basis for comparison because they are automatically geared to changes in volume. (iii) They provide a tailor-made budget for a particular volume. (iv) These are based upon adequate knowledge of cost behaviour pattern . Features:

16. Advantages It can help in sales, costs, and profit calculation at different levels of operating capacity. It helps to determine the quantity/amount of output to be produced to help the company achieve the desired profit level. The most significant advantage of this budget is that it helps the management of the company to determine the production level in different markets and business conditions.

17. Advantages It also helps in the reclassification of various levels of budgeted costs along with sales so that managers can easily identify the profit areas and thus may act accordingly. This budget can be re-casted on the basis of the activity levels. It is not rigid.

18. Disadvantages This budget requires skilled workers to work on it. The availability of skilled workers becomes a challenge for the industry. It depends upon the proper accounting disclosures. It is an expensive affair.

19. Disadvantages It also depends upon the factors of the production, which are not in the hands of the management. Therefore the predictions can be inaccurate due to these conditions. Variance Analysis  provides useful information as each cost is analyzed according to its nature. Thus it becomes difficult for the experts to prepare Flexible budgets.

20. Flexible budgets may be prepared in the following method: ( i ) Tabular method or multi-activity method (ii) Formula method or ratio method and (iii) Graphic method Examples

21. Example 1.

22. Example 2.

23. Example 3.

24. Production Budget The production budget is a plan or estimate of the quantum of products required for production by the organization over a period. It is an estimate based on the sales forecast. It also considers the desired inventory level the company wants to maintain

25. Production Budget The basis for preparing the production budget is the  sales budget . In simple equation form,  production budget  = The sales budget or forecast + Planned inventory to be maintained in the end – Inventory in the beginning.

26. Types of Production Budgets Production budgets include: Direct materials budget Direct labor budget Production overhead budget

27. Importance - Basis for Planning of Future Production Process. Helps in Taking Key Managerial Decisions Limitations - Based on Estimates Time Consuming Process.

28. Example 4.