Fixed and Flexible

Fixed budgets are made for one level of activity. They work well for evaluating performance when the planned level of activity is the same as compared to the actual level of activity. However, if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled.

For example, a company may produce a budget for 12000 units. This is used for comparison between planned fixed budget and compared with the actual results at the year-end to see whether we have achieved the planned output or not with costs control.

Flexible budget is a budget that adjusts or flexes with changes in volume or activity. It is prepared before the beginning of a budget period for a number of different activity levels.

A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of fixed budgets. They are importantly prepared in a way that makes them easy to flex to any activity level (by separating variable and fixed costs).

For example if the fixed budget plans for 10,000 units to be produced in the financial year then the flexible budget is made for different activity levels so we make flexible budgets based on different activity levels for 8000 / 9000 / 11000 and 12,000 units.

Flexible budget is prepared at the number of different activity level so if we have produced 8000 units in actual we can compare the actual results with the budget made for 8000 units; BUT if we have produced 12000 in actual we can compare the actual results with the budget made for 12000 units.

Is that all correct SIR?