The second column lists the variable costs as a percentage or unit rate and the total fixed costs. The next three columns list different levels of output and the changes in variable costs based on the increased or decreased sales. If such predictive planning is not possible, there will be a disparity between the static budget and actual results.
When you’re creating your budget, you may come across the terms “fixed budget” and “flexible budget.” Understanding the key differences between the two can help you as you develop and track your business budget. A static budget stays at a single amount regardless of how much activity there is. Many costs are not fully variable, instead having a fixed cost component that must be derived and then included in the flex budget formula. Flexible budgets are best used for startups that have a number of variables such as manufacturing, and others that have revenue based on seasonality, as costs are directly impacted by demand. After each month (or set period) closes, you compare the projected revenue against the actual revenue and adjust the next month’s expenses accordingly. This allows for a more symbiotic relationship between the two.
Sales Budget
This does not always happen but is why flexible budgets are important for giving management an indication of what questions need to be asked. Fixed expenses such as rent, utilities, equipment costs, and salaries usually make up a significant portion of any business budget. While it’s possible that these costs will change slightly, most businesses simply budget for them upfront.
A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant what is a flexible budget may serve 100, 150, or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served?
What is a Flexible Budget?
Keep in mind that accounting software is “rear-view” budgeting. For the most part, you’re recording expenses the business has already spent. If your accounting software doesn’t have advanced budgeting capabilities, you may want to look into standalone business budgeting software like PlanGuru, MoneyGrit. Business or Float which you can use with popular accounting software resources. So, for example, if your business sells more of your product than anticipated, the cost of goods sold as a percentage of sales will vary since you’ll likely need to spend more on raw materials, labor costs, etc.
- Historically financial modeling has been hard, complicated, and inaccurate.
- Since a flexible budget tries to adapt to changing resource levels in inventory and consumption, it offers a more precise level of control over business processes than a static budget can.
- A strategic plan usually forms the basis for an organization’s various budgets, which all come together in the master budget.
- It provides insights into how well an organization has managed its finances in response to changing conditions and activity levels.
- So, for example, if your business sells more of your product than anticipated, the cost of goods sold as a percentage of sales will vary since you’ll likely need to spend more on raw materials, labor costs, etc.
This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels. A flexible budget is an adjustable budget that companies create for different levels of activity, i.e., different output levels, revenues, or expenses for a single budgeting period. Using the cost data from the budgeted income statement, the expected total cost to produce one truck was $11.25. The flexible budget cost of goods sold of $196,875 is $11.25 per pick up truck times the 17,500 trucks sold. The lack of a variance indicates that costs in total (materials, labor, and overhead) were the same as planned. The flexible budget will show different possibilities for variable expenses and revenue.