Ask Joey ™ a Question

What is flexible budgeting?

The flexible budget is a financial plan that is prepared to identify and adjust for changes in the volume of activity. The flexible budget can often explain different volume levels within a relevant range to determine which components of a business should be eliminated. However, it can also be too dependent on the accurate identification of both fixed and variable costs. The flexible budget will be compared to the master (static) budget to understand existing variances.

Once variances have been determined the company should make the following adjustments:

1) Revenue will be adjusted by multiplying the actual quantity by the sales price.

2) Total variable costs will be adjusted by multiplying the actual quantity by the variable cost per unit.

3) Total fixed costs remain the same amount. Thus, no adjustments will be necessary.


You might also be interested in...

  • What is the relationship between volume and variable cost per unit?

    If the variable cost per unit remains fixed, then any increase or decrease in unit volume will result in an increase or decrease in total variable costs for a business. For example, if variable cost per unit was steady at $5, then if unit volume were to increase from 100 to 200 units, then total […]

  • How can variable sampling risk impact the efficiency or effectiveness of an audit?

    Audit risk is comprised of inherent risk, control risk, and detection risk. The level of substantive testing that the audit performs is based on detection risk, which is set after the audit team assesses inherent risk and control risk. Variable Sampling – Substantive Testing When the audit team is performing substantive testing, they will use […]

  • What happens if control risk is set too high or too low?

    Audit risk is comprised of inherent risk, control risk, and detection risk. Depending on how the audit team assesses control risk, they would set detection risk, which determines the level of substantive testing that should be performed. To assess control risk, the audit team would use attribute sampling to determine if the controls were operating […]