Comparing Simple and Flexible Budgets- Implications for Variance Analysis

Comparing Simple and Flexible Budgets- Implications for Variance Analysis

The differences between a simple and flexible budget lie in their adaptability nature. In a simple budget, income and expenses are constant. Such a budget remains constant regardless of the changes in the business environment. On the other hand, the flexible budget changes according to the current needs of a business. For instance, if managers of an organization feel that increased marketing efforts will enhance product sales, they will set aside more money to finance marketing efforts such as advertisement.

The calculation of variances in a static budget and a flexible budget differ. In a fixed budget, the original budgetary figures remain, while actual spending appears separately. The difference between projected figures and actual spending gives the budget variance (Horngren et al., 2002). However, in a flexible budget, variables are adjusted constantly as expenditure demands and income streams change. Thus, many organizations record figures in percentages of flexible budgets to avoid constant tinkering whenever changes occur.

Other differences between a simple budget and a flexible budget arise from two causes; differences in spending and activity level.  The flexible budget is formulated based on real-time revenue, activity level, and cost formulas (Horngren et al., 2002). Differences between actual and planned budgets based on activity levels give activity variances. On the other hand, differences between static and flexible budgets based on price per unit and expenditures give rise to variances in revenue and spending.

Organizations and people mostly combine static and flexible budgets in their budget-making processes. That is because they both play a significant and unique role in business accounting. One of the advantages of simple budgets is that they help keep the production costs in line. The procurement staff is sure they will not receive a financial boost, thus acquiring goods and services for low prices as possible.

References

Horngren, C. T., Bhimani, A., Datar, S. M., & Foster, G. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.

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Based on your readings this week, discuss the differences between simple and flexible budgets. Be sure to include specifics related to the impact on variance analysis.

Comparing Simple and Flexible Budgets- Implications for Variance Analysis

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