The master budget discussed before is a fixed budget.
A fixed budget is defined by:
- Only one level of activity
- Not adjusted to reflect actual activity level when change occurs
A fixed budget has the following limitations:
- It provides little assistance at the planning stage. It does not give implication of various alternative strategies which management may wish to consider.
- It fails to provide relevant and reliable base against which to measure actual performance where actual activity differs from the budget.
- Little motivation to management to use the budgeting control system as a control aid.
Flexible budget is a budget which is designed to change in accordance with the level of activity attained. It involves budgeting at various levels in anticipation of changes. The original budget is adjusted (flexed) to reflect the actual conditions in which the performance was done.
It is more useful than fixed budgeting due to:
- It provides a range of information at the planning stage which will assist in short term planning.
- Control: It provides control data when compared with actual performance.
- Motivation: More likely to be acceptable to management to provide a positive motivational stimulus because the control data is adjusted to conform with current activity level.
CHOICE OF BUDGET FLEXING BASIS
The most appropriate flexing basis should be considered in that it assists in the comparison of alternative budget data at the planning stage and for the comparison of budget and actual data at the control stage.
Different organizations use different flexing bases but the following are most commonly used.
- Machine hours
- Direct labour hours
- Input to a cost centre
- Output from a cost centre
For the above flexing bases to be used a number of requirements must be fulfilled.
- The flexing bases should be correlated with the way in which costs vary. E.g. does the number of miles traveled by distribution vehicles affect the repairs and maintenance expenses?
- The flexible bases should be easily understood by the management and not subject to manipulation.
- The flexible bases should be readily obtainable.
- It should be independent of other factors.
Other Custom Business Writing services
Businesswritingservices.org offers other custom business writing services such as Management writing services: Management essays, Management Dissertations, Management company analysis, Management Research papers and term papers: Finance writing services: Finance essays, Finance Dissertations, Finance case study analysis, Finance Research papers and term papers: Economics Writing Services: Economics essays, Economics Dissertations, Economics thesis, Economics Research papers and Economics term papers: Marketing Writing Services: Marketing essays, Marketing Dissertations, Marketing company analysis, Marketing Research papers and term papers:Business Writing Services: Business Essay, Business Research paper, Business term paper, Business Dissertation, Business Thesis, Business Case study: Auditing Writing Services: Auditing essays,Auditing Research papers, Auditing term papers, Auditing Dissertation, Auditing Thesis, Auditing Case study: Business information systems: Business information systems essays, Business information systems Research papers, Business information systems term papers, Business information systems Dissertation, Business information systems Thesis, Business information Case study: Taxation writing services: Taxation essays, Taxation Research papers, Taxation term papers, Taxation Dissertation, Taxation Thesis, Taxation Case study:Human resources writing services: Human resources essays, Human resource Dissertation, Human resources Thesis, Human resources case study, Human resources Research papers and term papers: Business law writing services: Business law essays, Business law Research papers and term papers, Business law dissertation, Business Thesis, Business law case study. Join the rest of our Business Writing services at Business Writing Services.org.