Flexible Budgets

1.     CheckPoint: Flexible Budgets

·         Respond in 200 to 300 words, to the following:

o    What is a flexible budget?

o    What are the steps to developing a flexible budget?

o    What information is found on a flexible budget report?

o    How is that information used to evaluate performance?

The flexible budget is a series of static budgets at different levels of activity; it is also another type of internal report. In order To develop the flexible budget, you should take the following steps.  First, identify the activity index and the relevant range of activity. Next, identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost. Then, identify the fixed costs, and determine the budgeted amount for each cost. Finally, prepare the budget for selected increments of activity within the relevant range. The flexible budget report consists of two sections: One, production data that is used for a selected activity index, such as direct labor hours, and two, cost data for variable and fixed costs.  Variable costs consist of indirect materials, indirect labor, and utilities.  Fixed costs consist of depreciation, supervision and property taxes.  Both actual and budget costs are based on the activity level worked. Since variable costs generally are incurred directly by the department, the difference between the budget allowance for those hours and the actual costs are the responsibility of the department manager. The report provides a basis for evaluating a manager’s performance in two areas, one is production control and the other is, cost control.