WEEK 10

STATIC AND
FLEXIBLE BUDGETS
FIXED AND FLEXIBLE BUDGET
 Fixed and flexible budget
Fixed budgets remain unchanged regardless of
the level of activity; flexible budgets are
designed to flex with the level of activity.
Flexible budgets are prepared using marginal
costing and so mixed costs must be split into
their fixed and variable components (possibly
using the high/low method).
The major purpose of a fixed budget lies in its
use at the planning stage, when it seeks to
define the broad objectives of the organisation.
Ngân sách cố định không thay đổi bất kể mức
độ hoạt động; ngân sách linh hoạt được thiết
kế để linh hoạt với mức độ hoạt động.
Ngân sách linh hoạt được chuẩn bị bằng cách
sử dụng chi phí cận biên và do đó, chi phí hỗn
hợp phải được chia thành các thành phần cố
định và biến đổi (có thể sử dụng phương pháp
cao/thấp).
Mục đích chính của ngân sách cố định nằm ở
việc sử dụng nó ở giai đoạn lập kế hoạch, khi
nó tìm cách xác định các mục tiêu chung của
tổ chức.
 Fixed budget
The master budget prepared before the beginning
of the budget period is known as the fixed budget.
By the term 'fixed', we do not mean that the
budget is kept unchanged. Revisions to a fixed
master budget will be made if the situation so
demands.
The term 'fixed' means the following.
(a) The budget is prepared on the basis of an
estimated volume of production and an
estimated volume of sales, but no plans are
made for the event that actual volumes of
production and sales may differ from
budgeted volumes.
(b) When actual volumes of production and
sales during a control period (month or four
weeks or quarter) are achieved, a fixed
budget is not adjusted (in retrospect) to
represent a new target for the new levels of
activity.
Ngân sách tổng thể được chuẩn bị trước khi bắt đầu giai
đoạn ngân sách được gọi là ngân sách cố định. Theo
thuật ngữ 'cố định', chúng tôi không có nghĩa là ngân
sách được giữ nguyên. Các sửa đổi đối với ngân sách
chính cố định sẽ được thực hiện nếu tình hình yêu cầu.
Thuật ngữ 'cố định' có nghĩa như sau.
Ngân sách được lập trên cơ sở ước tính khối lượng sản
xuất và khối lượng bán hàng ước tính, nhưng không có
kế hoạch nào được lập cho trường hợp khối lượng sản
xuất và bán hàng thực tế có thể khác với khối lượng dự
toán.
Khi đạt được khối lượng sản xuất và bán hàng thực tế
trong khoảng thời gian kiểm soát (tháng hoặc bốn tuần
hoặc quý), ngân sách cố định không được điều chỉnh
(khi nhìn lại) để thể hiện mục tiêu mới cho các cấp độ
hoạt động mới
 Flexible budget

Việc so sánh ngân sách cố định với kết quả thực tế

Comparison of a fixed budget with the actual results for a
đối với một mức độ hoạt động khác ít được sử dụng
different level of activity is of little use for budgetary
cho mục đích kiểm soát ngân sách.
control purposes.
Ngân sách linh hoạt nên được sử dụng để chỉ ra chi
Flexible budgets should be used to show what cost and
phí và doanh thu đáng lẽ phải có đối với mức độ
revenues should have been for the actual level of activity.
hoạt động thực tế.
Differences between the flexible budget figures and actual
Sự khác biệt giữa số liệu ngân sách linh hoạt và kết
results are variances.
quả thực tế là chênh lệch.
 Two uses of flexible budget
Two uses of flexible budgets

(a) At the planning stage. For example, suppose that a company expects to
sell 10,000 units of output during the next year. A master budget (the
fixed budget) would be prepared on the basis of these expected volumes.
However, if the company thinks that output and sales might be as low as
8,000 units or as high as 12,000 units, it may prepare contingency
flexible budgets, at volumes of, say 8,000, 9,000, 11,000 and 12,000
units, and then assess the possible outcomes.

(b) Retrospectively. At the end of each control period, flexible budgets can
be used to compare actual results achieved with what results should have
been under the circumstances.
 Two uses of flexible budget

Flexible budgets are an essential factor in budgetary control.

(i) Management needs to know about how good or bad actual performance
has been. To provide a measure of performance, there must be a
yardstick (budget/ standard) against which actual performance can be
measured.
(ii) Every business is dynamic, and actual volumes of output cannot be
expected to conform exactly to the fixed budget. Comparing actual costs
directly with the fixed budget costs is meaningless.
(iii) For useful control information, it is necessary to compare actual results
at the actual level of activity achieved against the results that should have
been expected at this level of activity, which are shown by the flexible
budget
PREPARING FLEXIBLE BUDGETS
 QUESTION

Suppose that Gemma expects production and sales during the next year to be 90%
of the company's output capacity, that is, 9,000 units of a single product. Cost
estimates will be made using the high-low method and the following historical
records of cost.
Units of output/sales Cost of sales
9,800 $ 44,400
7,700 38,100
The company's management is not certain that the estimate of sales is correct, and
has asked for flexible budgets to be prepared at output and sales levels of 8,000
and 10,000 units. The sales price per unit has been fixed at $5.

Required Prepare appropriate budgets.

 SOLUTION
If we assume that within the range 8,000 to 10,000 units of sales, all costs are fixed, variable or
mixed (in other words there are no stepped costs, material discounts, overtime premiums, bonus
payments and so on) the fixed and flexible budgets would be based on the estimate of fixed and
variable cost.
$
Total cost of 9,800 units = 44,400
Total cost of 7,700 units = 38,100
Variable cost of 2,100 units = 6,300
The variable cost per unit is $3.
$
Total cost of 9,800 units = 44,400
Variable cost of 9,800 units (9,800 x $3) = 29,400
Fixed costs (all levels of output and sales) = 15,000
 SOLUTION (cont’d)

Flexible budget Fixed budget Flexible budget

8,000 units 9,000 units 10,000 units
$ $ $
Sales (x $5) 40,000 45,000 50,000
Variable costs (x $3) 24,000 27,000 30,000
Contribution 16,000 18,000 20,000
Fixed costs 15,000 15,000 15,000
Profit 1,000 3,000 5,000
 The need for flexible budget

We have seen that flexible budgets may be prepared in order to plan for
variations in the level of activity above or below the level set in the
fixed budget. It has been suggested, however, that since many cost
items in modern industry are fixed costs, the value of flexible budgets in
planning is dwindling.

(a) In many manufacturing industries, plant costs (depreciation, rent and

so on) are a very large proportion of total costs, and these tend to be
fixed costs.
 The need for flexible budget

(b) Wage costs also tend to be fixed, because employees are generally
guaranteed a basic wage for a working week of an agreed number of hours.

(c) With the growth of service industries, labour (wages or fixed salaries) and
overheads will account for most of the costs of a business, and direct materials
will be a relatively small proportion of total costs.

Flexible budgets are nevertheless necessary, and even if they are not used at the
planning stage, they must be used for budgetary control variance analysis