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## FIXED AND FLEXIBLE BUDGETS ### Fixed Budget - A budget which remains unchanged regardless of activity level - Prepared based on an estimated production plan at the start of a period - It does not give a like with like comparison - Commonly used in service industries where most costs are fixed -...

## FIXED AND FLEXIBLE BUDGETS ### Fixed Budget - A budget which remains unchanged regardless of activity level - Prepared based on an estimated production plan at the start of a period - It does not give a like with like comparison - Commonly used in service industries where most costs are fixed - It does not give fair performance evaluation - It is normally prepared for planning purposes ### Flexible Budget - A budget that flexes the budgeted level of costs and revenues according to the level of activity actually achieved - It is initially prepared at the anticipated level of activity - The budgeted production level and the actual production level may not be the same - Budgets may need to be adjusted to reflect the actual production level - The new budget, flexed to the actual production level is called the flexed budget - The budget prepared on different activity levels is called flexible budget - For variance reporting, actual costs are compared with the flexed budget for the same volume of production and sales - Variance can be either favourable or adverse. Appropriate control action is then taken to control variances. - It gives a like with like comparison - It determines cost behaviour patterns - It gives realistic performance evaluation - It is the reporting of differences between budgeted and actual performance