Definition: A flexible budget, also called a variable budget, is financial plan of estimated revenues and expenses based on the current actual amount of output. In other words, a flexible budget uses the revenues and expenses produced in the current production as a baseline and estimates how the revenues and expenses will change based on changes in the output. This is why it’s often called a variable budget. Management often uses flexible budgets before a period to predict both a best case and worse case scenario for the upcoming accounting period. This provides a “what if” look at the future of the company’s financial performance.
What Does Flexible Budget Mean?
Flexible budgets can also be used after an accounting period to evaluate the successful areas and unsuccessful areas of the last period performance. Management carefully compares the budgeted numbers with the actual performance statistics to see where the company improved and where the company needs more improvement.
A flexible budget is usually designed to predict effects of changes in volume and how that affects revenues and expenses. In order to accurately predict the changes in costs, management has to identify the fixed costs and the variable costs. Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases.
Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced.
A typical budget is usually formatted with five columns. The first column lists the sales and expense categories for the company. 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.