Flexible Budget: All You Need to Know About!

In this article, we cover the flexible budget. Now let’s go through some basic overview. As you may know, budgets are financial forecasts of a business for its revenue and expenses for a specific period. These are quantified estimations of revenues and expenses. A budget can be planned for various activities or divisions of a business. Budgets offer planning and control measures for business.


A Flexible Budget is a type of budget that can change the input variables over time. Unlike a static budget, it can include any activity level from the business. It is a forecast of revenues and expenses with varying levels of activity levels. The activity level can be defined differently for any business. As the total cost of production can be divided into fixed costs and variable costs, flexible budgeting often associates variable costs with changing activity levels.


Flexible budgets take into account any activity level; therefore the activity level can be different for any business.

Total cost  =  Fixed Cost + (Variable Cost × Activity Level)

The Variable cost should be used as per unit or per activity level in the equation.

The actual results are then compared with the forecast or planned budgets to analyze the variance. The activity level here may refer to different cost drivers affecting the variable costs such as labor hours, direct materials, or sales commission, etc.

Flexible Budgets and Static Budgets – the Difference

Static budgets do not allow for any changes in the variables with a change in the activity level. If the business changes the production level, its variable costs are bound to change too. A static budget would not consider the changes with a change in production or sales level. A static budget approach monitors the planned and actual results, focusing mainly on achieving the set targets.

As variables change over time, for example, raw material prices may change over time. The flexible budgets consider these changes, adjust the budgets and compare with actual results. The revised budgets may still have variances with actual results. A flexible budgeting approach narrows the gap between actuals and standards due to changes in activity levels.

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Static budgets usually consider fixed costs, set targets to achieve results within the allocated resources. However, budgets are planned well before the actual production begins. The management may decide to change the production levels, depending on sales targets and other factors. The static budgets may then act as a starting point for a flexible budgeting approach. The revised budgets can then be compared with actual results to analyze realistic variance factors.

Flexible Budget Performance Report – Working Example

A Flexible budgeting performance report is the one that analyzes the actual results against the standard budgets. The differences are terms as the variance. A positive variance means the company produced favorable results and achieved higher efficiency than planned. An adverse variance means the company failed to achieve the target or standard plans. As the budget can be made for any activity, the variance should also be analyzed separately for these activities. The variance analyses can help the management to understand the causes and cost drivers behind the change, positive or negative.


A company Tech Blue co. estimates a total production capacity of 300,000 units. The sale price per unit is set at $ 15. The fixed production costs are calculated to be $850,000. Direct material costs and labor costs per unit are $ 5.50 and $ 3.50 respectively. Additionally, the company offers sales incentives to the sales force on 5% of sales. What will be total cost of the unit production with a maximum utilized capacity of 85%? And if the company achieves lower efficiency of 75% production or higher 90% production capacity.

We can calculate the flexible budget performance report based on different production level.

Production LevelAt 100%At 85%
At 75%At 90%
Sales Revenue at $ 154,500,0003,825,0003,375,0004,050,000
Direct material $ 5.501,650,0001,402,5001,237,5001,485,000
Direct Labor $ 3.501,050,000892,500787,500945,000
Sales Commission at 5%15,00012,75011,25013,500
Fixed Costs850,000850,000850,000850,000
Total Costs3,565,0003,157,7502,886,2503,293,500
Profit Margins935,000667,250488,750756,500
Variance in Margins:0-178,50089,250

As the production level is set as an activity level to determine the budgetary and actual results, the variance in margins can be analyzed based on production levels. A production level of 100% efficiency remains unachievable for any business. The business planned for an 85% production level. The flexible budgeting can forecast the difference in margins if all other things being equal, the variance in margins will change with production levels.

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Flexible Budget Variance

It is the calculated difference between the planned or forecast budget against the actual results. In our working example, the company sets out a target of 85% production capacity. The budgeted or planned sales volume of 255,000 units would yield profits of $667,250. If the company performs below targets and produces only 225,000 units its profits will fall showing an ADVERSE variance of – $ 178,500. Similarly, an above target performance will result in a FAVORABLE variance of $ 89,250.

It is pertinent to note that actual results will always differ with the planned targets. Budgeting helps management to analyze the causes or factors behind the variances. Flexible budgets will allow the management to revise and adjust to the new targets. In our example, the company might have set a target of 90% production, revised it to 85% and still would have achieved a 75% production level.

Variance analysis in absolute figures cannot reveal the actual causes. The management may also adjust sales prices to achieve the favorable variance provided it doesn’t affect the competitive edge. Budgeting and variance analyses can help management to price the products at an optimum level, meeting the market competitions and covering the production costs.

For example, the management may consider adjusting the sales price by 1-3% generating excess revenues. The management can also work with operational management to reduce the idol labor hours and machine wastes to increase the production capacity. These slight adjustments can help the company to achieve higher levels of efficiency. A static budgeting approach would compare the results at the end of the production period, where the variances cannot be adjusted.

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Advantages of Flexible Budgeting Approach

Flexible budgeting provides useful information in advance that can help in better planning. Flexible approach of budgeting can adjust to the variances quickly and result in better controls in operations. The biggest advantage with flexible budgeting is the stress on operational efficiency to achieve the standard targets.

Unlike Static budgeting, it does not fix all target costs. Flexible budgeting takes into account for each activity that makes the performance measurement a better control tool. The flexible budgeting takes considers both fixed costs and variable costs with variance analysis. The management may set flexible targets to cover the fixed costs first and gradually build on profits later. Variable costs assigned with sales activity or in percentage terms offer greater flexibility in profit analysis.

Limitations of Flexible Budgets

Although the flexible budgeting approach offers greater advantages over static budgets, it also has some limitations attached.

  • Flexible budgeting requires frequent changes and adjustments that can be costly
  • Adjusting for revised production or activity levels with limited or unplanned resources may not be feasible for operational managers
  • Revised budgets may still not be updated accurately and actual results may fall short, resulting in low staff morale
  • As with any budgets, flexible budgets are forecasts that may change by the time of production


The Flexible budgeting approach is more practical and realistic than static budgeting. It sets flexible targets for management with achievable results. The flexible budgeting variance analyses can be performed for each activity, offering valuable information on discrepancies in operations and planning.

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