A Flexible Budget: Used In The Real World
Define a flexible budget
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. In other words, it is “a revised master budget based on the actual activity level” (Heisinger & Hoyle, 2012, p. 745). In a given business activity, a flexible budget represents what cost or the cost that should be allocated to a particular activity. So, it is fair to conclude that a flexible budget has the capacity to adjust expenses based on changes in actual revenue or other activities of a company.
Provide an example of how a flexible budget is used in the real world.
There are various examples that can be deduced from how a flexible budget is used in the real world. However, one essential example is when a company intends to modify the master budget for actual sales that is when a flexible budget is used. For instance, if a Company has a budget of ten million in revenues and a four million cost of goods sold. Of this four million in budgeted cost of goods sold, one million is fixed, and three million varies directly with revenue. Therefore, the variable portion of the cost of goods sold is 30% of revenues. When the budget period is completed, the company discovers that sales were actually nine million. If the company used a flexible budget, the fixed portion of the cost of goods sold would still be one million, but the
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