Flexible budget is a budget that changes with the changed production/sales volume or other significant variable. Budgeted sales/revenues and variable costs are therefore flexed with the actual activity level, but fixed costs usually remain unchanged. Flexible budget shows how the financial plan/target would look like if actual (not planned) sales/production volume were used. The variances between budget and actual are therefore usually much lower than with fixed budgets. The condition of using this approach is splitting of all costs into variable and fixed components.
Therefore, flexible budgets are a kind of sensitivity analysis.
Flexible budget is useful mainly when/during
- the budget does not serve as a target
- there are substantial changes in production/sales volume
- costs are largely variable
- evaluating the performance of responsibility centers (25)
In practice, flexible budgets are used less often than fixed budgets mainly because:
- they are available with significant time delay (25) as actual volumes must be known
- budgets usually serve as fixed targets
- the proportion of fixed costs on total costs is still increasing
- it may be difficult to split semi-variable costs into variable and fixed components (25) or the result of doing so would be misleading
The opposite term to flexible budget is fixed (or static) budget. (25)