6/22/09

What is the difference between Flexible Budget and Fixed Budget and Their Uses in Budgetary Control System

Basically, there are two main categories of budget namely the flexible and fixed budget. Below article describe what is a flexible and fixed budget and differentiate them.


A flexible budget is a budget which is designed to change in accordance with the LEVEL OF ACTIVITY attained.

It is also known as Variable budget as the budget recognizes the difference in cost behavior namely fixed and variable costs in relations to fluctuations in output or turnover. The budget is designed to change appropriately with such fluctuation.

For a fixed budget, the budget remains unchanged irrespective of the level of activity actually attained.

The fixed budget is prepared based only on one level of output.

Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise.

For some companies, due to the nature of business does not suit fixed budget preparation:

  • Affected by weather condition like the soft drink industry;
  • Companies frequently introduce new product line like the food canning industry;
  • Production is carried out only when orders are received from customers like shipbuilding,aircraft industries;
  • Affected by changes in fashion like millinery trade;
  • Export orientated business

THE MAIN DIFFERENCE Between Fixed & Flexible Budget:

  • For a fixed budget, the figures are for a SINGLE level of activity while a flexible budget is prepared for DIFFERENT levels of activity;
  • Under fixed budgets, managers are held responsible for variances not under his control ( both fixed and variable cost);
  • The fixed budget is never able to assess properly the efficiency and actual performance of the manager.

For example, a fixed budget is set with a planned 8,000 hours but an actual 10,000 hours are recorded, from both the motivational or control point, it is difficult to gauge the efficiency of the manager(s) who are involved in the manufacture of the output at that actual level;

  • The flexible budget allows more meaningful comparison as it flexs to the actual volume. It computes what costs should have been for the actual level of activity and
  • The flexible budget has the advantage of assisting the managers deal with uncertainty by allowing them to see the expected outcomes for a range of activity;

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