Sample Essay
The flexible budget based technique for budgeting tends to project the revenue and the expenditure on the basis of the different levels of production. It depicts how the different costs tend to vary with the output rate and the volume level of production. Currently the company has been using a static budget, as opposed to the flexible budget is more useful for the company as it tends to take into account the actual level of output.
“If the factory actually produced 10,000 units, then management should compare actual factory costs for 10,000 units to what the factory should have spent to make 10,000 units, not to what the factory should have spent to make 9,000 units or 11,000 units or any other production level.” (Caplan) The flexible budgets are usually prepared at the end of a financial year or period. The flexible budgeting system also takes into account the pro forma analysis according to which the forecasted years financial statements can be analyzed and then compared against the current financial statements to determine the variance. This system is advantageous for planning purposes.
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