A budget is an important tool used for planning in accounting. A budget may be prepared for an individual, organization, or government of a nation despite the amount of income available for the budgeting process. Thus, budgeting is very important as it helps in gauging the financial position of an individual, organization or country from the way it spends the income it has (Caplan, 2006, p.1). A budget is also used as an estimate of the future financial position of the organization through forecasting. By getting this information, the affected parties are thus able to prepare and make plans on how to face any challenges that may have been predicted.
There are many types of budgets some of them include; personal budgets, fixed budgets, flexible budgets, Revenue budgets, expenditure budgets just to mention but a few. Each and every budget is prepared for different persons and in different circumstances but the functions are all the same. The main purpose of a flexible budget is that of evaluating the performance of the organization. It is because of this reason that it is prepared during or at the end of the accounting period. A flexible budget is the opposite of a fixed budget in that it can be adjusted to accommodate any available changes in the organizational financial status. This is therefore what brings about the flexibility, unlike in a fixed budget where the figures cited are not subject to change no matter the financial position or circumstances.
Characteristics of a flexible budget
A flexible budget has defined features that distinguish it from the other budget types. Its main distinguishing characteristic is that of being flexible. This flexibility is practical and applicable in many circumstances. A flexible budget has fluctuating cost of outputs that varies with the volume of sales made (Caplan, 2006, p.1). This in turn leads to fluctuating rates of revenue that are directly proportional to the level of output.
Another characteristic of a flexible budget is the allocation of funds to the different organizational departments or sectors in the case of a government. A flexible budget allocates funds according to the revenue generated by that department. This means that in a case where a department or sector improves its revenue, then the fund allocation will increase unlike in a fixed budget where everything remains constant (William, 1999, p.23).
Importance of a flexible budget over the other types of budgets
Apart from the main function of planning and evaluating a flexible budget is a motivational tool in the organization. This is because the output is what determines the financial input and so the people try to work hard so as to increase their income. By creating the environment for working hard it means the general turnover of the organization will also be high.
Another advantage of a flexible budget is that it is prepared in such a way that there is room for adjustments (Garrison, et al, 2007 p.33). The ability of a flexible budget to be easily and quickly amended then, therefore, makes the accountant’s work easier and convenient. In contrast with the fixed budget that does not accommodate any changes hence leaving pending matters to be amended, a flexible budget considers any deviations.
From the above discussion it can be concluded that just like the other types of budgets, a flexible budget is of great use in accounting. Since nothing is always perfect, a flexible budget has the disadvantage of being a little bit more cumbersome as compared to the other budget types. This can be attributed to the various changes and amendments made to the budget even after preparation.
Caplan, D. (2006). Management Accounting: Concepts and Techniques. Web.
Garrison, R.H., Noreen, E.W., & Brewer, P.C. (2007). ACC 561: Managerial accounting: Custom edition 2010 (12th ed.). Boston, McGraw-Hill.
William, B. (1999). Accounting for managers: Text and Cases, (2nd ed). Cincinnati: South-Western.