What is a flexible budget? Definition and example

A Flexible Budget is a budget or financial plan that varies according to the company’s needs. A flexible budget may refer to a whole company or a department. The designers of the budget made it flexible deliberately. They made it flexible because the specific company’s or department’s needs do not remain static.

This type of budget contrasts with a static budget. A static budget stays at a single amount regardless of how much activity there is.

Flexible budgets calculate, for example, different levels of expenditure for variable costs. These levels vary depending on the changes in revenue. Subsequently, the budget varies, depending on the activity levels that the company experiences. Such a budgeting method is particularly useful for businesses with fluctuating sales cycles, allowing them to align their spending more closely with their actual income.

Variable costs are costs that go up and down each month, i.e., they ‘vary.’

AccountingTools.com has the following definition of the term:

“A flexible budget calculates different expenditure levels for variable costs, depending upon changes in actual revenue.”

“The result is a budget that varies, depending on the actual activity levels experienced.”

Flexible Budget
If the financial needs of a factory, for example, change regularly, a flexible budget makes more sense.

The flexible budget adapts

Flexible budgets adapt to the changing needs of a company.

Accountants enter actual activity measures into the flexible budget at the end of the accounting period. It subsequently generates a budget that ties in specifically with the inputs.

For control purposes, the accountant then compares the budget to actual data.

Flexible budget – example

Let’s imagine that a manufacturer has determined what its electricity and supplies costs are for the factory. It requires $8 per MH. MH stands for machine hour.

The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month.

Fixed costs do not change each month, i.e., they remain the same. Insurance premiums and rent, for example, are fixed costs.

Its production equipment operates, on average, between 3,500 and 6,500 hours per month.

According to this data, the monthly flexible budget would be $35,000 + $8 per MH.

  • 4,500 hours in February

Let’s suppose the production machinery had to operate for 4,500 hours during February.

The flexible budget for that month would be $35,000 + ($8 x 4,500) = $71,000.

  • 5,000 hours in March

What if the production machinery had to operate for 5,000 in March?

The flexible budget for that month would be $35,000 + ($8 x 5,000) = $75,000.

Flexible budgets make sense

If the factory has to use more machine hours one month, its budget should logically increase. Conversely, if it uses them for fewer hours, its budget should reflect that decline.

This responsive approach allows for more accurate financial forecasting and better resource allocation, aligning expenses closely with operational activity.

Regarding static and flexible budgets, Accounting Coach writes:

” In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget.”

Using “flexible budget” in context

Below, you can see seven sentences containing the words “flexible budget,” which may help you see how we use the term in context:

  1. “The finance team prepared a flexible budget to accommodate the seasonal fluctuations in demand that the company typically experiences.”
  2. “During the quarterly review, management praised the use of a flexible budget for its ability to adjust to the actual production volumes.”
  3. “Small businesses often benefit from flexible budgets since they can adapt more readily to market changes and unexpected costs.”
  4. “The department’s flexible budget allowed for additional funds to be allocated to marketing during the peak sales period.”
  5. “When implementing a flexible budget, the company must carefully monitor variable costs to ensure they align with the current level of business activity.”
  6. “The new manager was tasked with developing a flexible budget that could respond to the dynamic nature of the tech industry’s rapid growth.”
  7. “To accurately assess performance against financial targets, the company’s leadership compared actual spending with the flexible budget projections.”

Two Videos

These two educational video presentations, from our sister YouTube channel – Marketing Business Network, explain what a ‘Flexible Budget’ and ‘Budget’ are using simple, straightforward, and easy-to-understand language and examples.

  • What is a Flexible Budget?

  • What is a Budget?