Homework SourseWhat s the difference between a planing budget and a flexibl
What s the difference between a planing budget and a flexible budget? When would you use each of them?
Solution
Part-a : - Difference between planning budget and flexible budget
Part-b - Use of planning and flexible budget
Company uses planning budget in those activities which remains constant , change is less. Generally we apply for annual budget preparation. Flexible budget variances may be used to determine any shortcomings in actual performance during a given period. Flexible budget variances are simply the differences between line items on actual financial statements with those on flexed budgets. Flexible budget may also be useful in planning stage at the beginning of the accounting period.
| Basis for Comparison | Fixed Budget | Flexible Budget | ||
| Meaning | The budget designed to remain constant, regardless of the activity level reached is Fixed Budget. | The budget designed to change with the change in the activity levels is Flexible Budget. | ||
| Nature | Static in nature | It is Dynamic in nature | ||
| Activity Level | Only once in a year | Prepared in Multiple times | ||
| Performance Evaluation | Comparison between actual and budgeted levels cannot be done accurately, if there is a distinction in their activity level | It provides a good base for making a comparison between the actual and budgeted levels. | ||
| Rigidity |
| Flexible budget can be easily modified in accordance with the activity level attained. | ||
| Fixed Budget is inelastic, as it cannot be re-casted as per the actual output | Conversely, the Flexible budget is elastic because it can be easily adjusted according to the volume of the production. |
