Flexible Budgets (Cambridge (CIE) A Level Accounting): Revision Note
Exam code: 9706
Flexible Budgets
What are flexible budgets?
Fixed budgets do not change even if the actual figures are different
When the actual units sold and produced are different from the budgeted units, then a flexible budget is needed
There is no value in comparing the actual results to the budgeted results when the level of units is different
In a flexed budget, the key budgeting information will reflect the actual output
This is particularly relevant when preparing variance analysis
This is used in standard costing
It is more meaningful for managers to use a flexible budget as a means of comparison to the actual data
How to prepare a flexible budget?
STEP 1
Change the budgeted revenue to match the actual units:Budgeted revenue ÷ budgeted units × actual units
STEP 2
Change the budgeted direct material to match the actual units:Budgeted direct material ÷ budgeted units × actual units
STEP 3
Change the budgeted direct labour to match the actual units:Budgeted direct labour÷ budgeted units × actual units
STEP 4
Change the budgeted fixed overheads to match the actual units:Budgeted fixed overheads ÷ budgeted units × actual units
Worked Example
Laptop limited make and sell laptops. Here is the information regarding the fixed budget and actual results for one month:
Fixed budget | Actual results | |
|---|---|---|
Production and sales (units) | 20 000 | 28 000 |
Sales revenue $ | 9 000 000 | 11 200 000 |
Direct material $ | 2 400 000 | 3 920 000 |
Direct labour $ | 2 000 000 | 1 960 000 |
Fixed overheads $ | 1 000 000 | 1 260 000 |
Total cost | 5 400 000 | 7 140 000 |
Total profit | 3 600 000 | 4 060 000 |
Prepare the flexible budgeted statement based on the information provided
Answer
Change the budgeted revenue
($9 000 000 ÷ 20 000) × 28 000 = $12 600 000
Change the budgeted direct material
($2 400 000 ÷ 20 000) × 28 000 = $3 360 000
Change the budgeted direct labour
($2 000 000 ÷ 20 000) × 28 000 = $2 800 000
Change the budgeted fixed overheads
($1 000 000 ÷ 20 000) × 28 000 = $1 400 000
Flexible budget $ | |
|---|---|
Revenue | 12 600 000 |
Direct material | 3 360 000 |
Direct labour | 2 800 000 |
Fixed overhead | 1 400 000 |
Total cost | 7 560 000 |
Total profit | 5 040 000 |
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