What is a Flexible Budget?

A Flexible Budget estimates future costs and revenues that can be adjusted to reflect changes in the level of activity.

Why use a Flexible Budget?

Flexible Budgets can help managers better understand how activity levels change impact costs and revenues. They can also help managers make better decisions about where to allocate resources.

How do you create a Flexible Budget?

A Flexible Budget is typically created by estimating costs and revenues at different activity levels and adjusting for any likely variances.

Are there any drawbacks to using a Flexible Budget?

There are no significant drawbacks to using a Flexible Budget. However, it is essential to note that a Flexible Budget should not be used in place of sound Financial Planning. Instead, a Flexible Budget should be used as a tool to help managers respond to fluctuations inactivity but should not be relied upon to make decisions about the future organizational activity.

What are the types of Flexible Budgets?

There are two types of Flexible Budgets: static and rolling. With a static budget, the company sets a specific budget amount for each period, regardless of how much revenue or expenses actually vary from month to month. A rolling budget, on the other hand, adjusts automatically as actual revenue and expenses change from one month to the next. This type of budget is more responsive to actual business conditions, but it can be more difficult to track and manage.

Flexible Budgets MCQ Quiz With Answers

Take this quick test on flexible budgets to help you prepare for your exams and interviews. The quiz will allow you to assess your knowledge and see how well you've understood the key topics and concepts.

1. Which of the following is not a characteristic of a flexible budget?

Providing estimates of what costs should be for any activity within a relevant range
Taking into account change in costs that should occur as a result of changes in activity
Prepared at the beginning of the budgeting period and is valid only for the planned level of activity
When used for performance evaluation, actual costs are compared to what costs should have been for the actual level of activity during the period

2. A static budget:

Works well to illustrate controls over costs
Confuses control over activity with control over costs
Provides meaningful budget numbers at different levels of activity
None of the above

3. Flexible budgets relate to activity-based costing in which of the following ways:

Flexible budget is incompatible with activity-based budgeting
Flexible budgeting can be compared with activity-based budgeting cost drivers in total but not individually
Flexible budgeting can be compared with activity-based budgeting cost drivers individually as long as the comparison is based on common measures of activity (e.g., direct labor hours or machine hours)
Flexible budgeting can be compared with activity-based budgeting cost drivers individually as long as the comparison is based on different types of activity rather than common measures (e.g., direct labor hours or machine hours)

4. Budget variance is:

The difference between actual fixed overhead costs and overhead costs incurred at the standard level of activity
The difference between budgeted fixed overhead costs and overhead costs incurred at the standard level of activity
Favorable if the company operates at an activity level greater than planned for the period
Unfavorable if actual fixed overhead costs are greater than budgeted fixed overhead costs

5. Which of the following is true about overhead variance?

Under or overapplied overhead is the difference between the amount of overhead applied to products and the actual overhead costs incurred during the period
The sum of the overhead variance equals the underapplied or overapplied overhead cost for the period
Unfavorable overhead variance is equal to underapplied overhead and favorable variance is equal to overapplied overhead
All of the above