Fixed, Flexible and Flexed Budget

ACCA F5 - Performance Management 

One of the 3C's of budget in 'A3CDEPM' means "control". Budget focuses on controlling costs. Figures in approved budget guide relative activities. This does not mean actual and approved figures always tally each other. Actual figures can exceed or deceed (fall below) budgeted figures. Controlling means finding reasons for variances in budgeted and actual figures and implementing corrective action to curb unnecessary expenses and stay within budget.

Fixed, Flexible and Flexed budget

Ø  Fixed budget - Budget prepared for defined activity level / (output) is fixed budget. Fixed budget presents figures as if production level, price and all costs are static in nature but in real only fixed costs remain unchanged. Therefore, variances in corresponding figures are the result of change in volume produced and/or sold.

Ø  Flexible budget - Budget that recognises changing nature of costs with changes in output level is flexible budget. For comparison of corresponding flexible budget is revised to give a flexed budget.

Ø  Flexed budget - Flexible budget revised at actual activity level is flexed budget. Flexed budget identifies the (variable, fixed, semi-variable and step fixed) nature of costs with the change in volume. Original budget is revised to reflect the effect of variable elements, and step fixed costs at actual output. After adjustment, the corresponding figures are compared to calculate variances. The variance is not a result of change in output level but result of change in expenditure level.

Overall, the variance calculation in relation to fixed budget and flexed/flexible budget shows overall picture of firms performance taking account of changes in production level and expenses level. Most likely budget sets expected performance and variance reflects the deviation from the expectation. This helps managers to identify the areas where changes are necessary. This does not mean that managers are capable of changing costs in all areas.

There are areas where managers cannot control the costs. E.g. Non routine repair of bottleneck machine, which is not included in budget or rent and rates as per agreements. These types of costs are uncontrollable costs. Whereas costs, which can be influenced by, authorised person are controllable costs. E.g. advertisement, stationary and material wastage.

Note: Over long run most costs are controllable by someone in the organisation.

CIMA Article: Flexible Budgeting