Functional and Flexible Budgeting

Module -5
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Functional Budget

• A budget is a tool that helps identify expected income and expenses

over a particular period. Budgets are used by management to control
spending and manage the growth of a business.
• A functional budget is a budget which relates to any of the functions of
an undertaking,

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 Types of Functional Budget

Sales Budget Production Budget Materials Budget Labour Budget

Manufacturing Administrative Distribution

Cash Budget
Overheads Budget Overhead Budget Overhead Budget

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 Flexible Budgets

• A flexible budget is a budget or financial plan of estimated cost and revenue

for different levels of output. The variation happens due to the change in
the volume or level of activity.
• It sets the standard to measure the variances of the budget estimates and
the actual performance of the company for control purposes. Further, it can
be prepared either for the whole company or a specific department or unit.

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 Utility (or Importance) of Flexible Budget:

• Provides a logical comparison of budgeted allowances with the actual cost.

• Profit planning.
• Recognises concept of variability and provides logical comparison of expenditure with
actual expenditure as a means of control.
• Useful for purposes of budgetary control.
• Helpful in assessing the performance of departmental heads.
• Cost ascertainment at different levels of activity is possible
• Helpful in price fixation and sending quotations
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Types of Cost
• Fixed Cost
• Variable Cost
• Mixed Cost

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Variance Analysis
• Variance Analysis deals with an analysis of deviations in the
budgeted and actual financial performance of a company. The
causes of the difference between the actual outcome and the
budgeted numbers are analyzed to showcase the areas of
improvement for the company.

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Definition of Variance analysis

• I.C.M.A., defines “Variance analysis is the resolution into

constituent parts and explanation of variances”.
• S.P. Gupta, define “Variance analysis is the measurement of
variances, location of their root causes, measuring their effect and
their disposition”.

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 Need and Importance of Variance
Analysis

Variance analysis aids efficient budgeting activity

Variance analysis acts as a control mechanism.

Variance analysis facilitates assigning responsibility and engages

control mechanisms on departments where it is required.
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Advantages of Variance analysis
It is highly useful for fixing responsibility of an individual or department or section for
each variance separately.

It highlights all inefficient performances and the extent of inefficiency.

It is used for cost control.

Profit planning work can be properly carried on by the top management.

It creates cost consciousness in the minds of every employee of business organization.

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Types of Revenue Variances
• Sales Volume Variance
• Selling Price Variance
• Sales Mix Variance

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 • Material Cost Variance: It is the
difference between actual cost of
materials used and the standard cost for
the actual output.
Types of • Labour Cost Variance: It is the

Cost
difference between the actual direct wages
paid and the direct Labour cost allowed

Variances for the actual output to be achieved.

• Overhead Variance: Overhead variance
is the difference between the standard cost
of overhead allowed for actual output (in
terms of production units or labour hours)
and the actual overhead cost incurred.
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Variance Report

• A variance report is a document that compares planned

financial outcomes with the actual financial outcome. It is a
report where deviations are properly identified for
informational and decision-making purposes.

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 Disposition of Variances

• Disposition of Variance means closing of

variances to cost of goods sold or
income summary if they are immaterial.
Variances that are material may be
prorated.
• All types of variances are transferred to
costing Profit and Loss Account

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