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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.

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