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1) Flexible budget is prepared before the beginning of a budget period. It is prepared for a number of activity levels. For example if we budget our plan for 10,000 units the flexible budget is made for different activity levels because actual activity level may be different at the year-end due to changes in demand or whatever reasons so we make flexible budget for 8000 / 9000 / 11000 and 12,000 units.
2) Flexed budget adjusts (or flexes) the fixed budget to reflect actual output volumes at the year-end. For example the original budget figures may have been based on original plan of producing 10,000 units. If we actually produce 12,000 units then unless we reflect this in our original budget figures our comparison to actual will be meaningless.
So we need to always compare with the same activity levels between original fixed budget and actual result of 12,000 units which would be done by flexed budget.
Are these both statements true. I was confused between both of them.
Thanks in advance 🙂
Flexibly budgets may be prepared at a number of different activity levels, but more importantly are prepared in a way that makes them easy to flex to any activity level (by separating variable and fixed costs).
What you have written in the second statement is all true.
I did not get where I was wrong in my first statement. Please state.
I didn’t say you were wrong. I simply said that it does not have to be prepared at specific activity levels.