Advantages of Flexible Budgets: Flexible budgets are more adaptive to changing conditions, Flexible budgets allow more accurate performance evaluations, Flexible budgets enable better cost control by noting actual costs at differing levels of activity, identifying variances, and allowing for informed adjustments to be made, Flexible budgets allow for more realistic and achievable performance targets, which can motivate employees and increase morale, Disadvantages of Flexible Budgets: Flexible budgets are more complicated and time-consuming than static budgets. Flexible budgets require regular updates and adjustments, Flexible budgets require predicting activity levels - inaccurate predictions can lead to inaccurate budgeting, Flexible budgets may lead to more bias in the budgeting process, as changing conditions are somewhat subjective, Flexible budgets can be manipulated by managers to make their performance look better, Flexible budgets are best built with historical data, so if information is scarce, it may be challenging to create an accurate budget, How to Create a Flexible Budget: Identify costs and separate them by fixed and variable, Determine the percentage of variable costs per activity level or per-unit basis by dividing the total planned variable costs by estimated production, Create a budget using fixed costs and percentage of variable costs determined, Update the budget after each accounting period with actual revenue/expenses and calculate variances, Utilize the final flexible budget at year’s end to compare total actual vs. budgeted for more accurate future forecasting,

Flexible Budgets

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