Flexible budgeting

Welcome to this session on flexible budgeting. Unlike the traditional static budget, which is based on fixed assumptions about sales or production levels, a flexible budget is designed to adjust for changes in activity throughout the budget period. This means a flexible budget responds to actual results, not just what was originally planned. Flexible budgeting is vital because in the real world, business conditions rarely remain exactly as expected, and having a tool to manage uncertainty is crucial for effective financial control. A flexible budget breaks costs into variable, fixed, and semi variable components, allowing it to reflect changes in activity such as output or sales volume. For example, if a company manufactures chairs and produces more or fewer than planned, the flexible budget will show what costs and revenues should have been given the true level of activity. This is especially helpful in performance evaluation. By comparing actual results to what the budget should have been at the actual level of activity, managers gain a clearer picture of efficiency and cost control rather than simply comparing to an unrealistic static target. Flexible budgets serve several critical roles. They enable better planning by allowing managers to see expected costs and revenues at different levels of activity. They also improve control by highlighting variances that are meaningful, such as when actual labor, materials, or overhead costs differ from what should have happened at the real production output.