7.3: Flexible Budget

A flexible budget addresses the shortcoming of the static budget by providing budgeted amounts at various quantity levels. A sample flexible budget follows.

Packing Department Budget For the Year Ended December 31, 2019

Planned number of production units	10,000	12,000	16,000	20,000
Variable costs:
$\ \quad \quad$Packing materials	$30,000	$36,000	$48,000	$60,000
$\ \quad \quad$Direct labor	15,000	18,000	24,000	30,000
$\ \quad \quad$Variable utilities cost	5,000	6,000	8,000	10,000
$\ \quad \quad\quad \quad$Total variable costs	$50,000	$60,000	$80,000	$100,000
Fixed costs:
$\ \quad \quad$Supervisor salary expense	$60,000	$60,000	$60,000	$60,000
$\ \quad \quad$Depreciation expense	7,000	7,000	7,000	7,000
$\ \quad \quad$Machine rental expense	3,000	3,000	3,000	3,000
$\ \quad \quad\quad \quad$Total fixed costs	$70,000	$70,000	$70,000	$70,000
Total budgeted costs	$120,000	$130,000	$150,000	$170,000

The flexible budget is more useful to managers since budgeted costs can be compared to actual costs for several activity levels. The example of the flexible budget for the Packing Department shows four possible levels of production: 10,000; 12,000; 15,000; and 20,000 units. If actual costs were $130,000 and 12,000 units were processed, the budget would have accurately predicted actual costs. If actual costs were $130,000 and 10,000 units were produced, the department would have been over budget by $10,000. A flexible budget is basically a menu of static budgets to select from based on the number of actual units involved.

The same financial statement formats that summarize and present results of economic events from previous periods may also be used to communicate quantitative projections of future performance. For example, the income statement includes sales and multiple line items related to cost information, each of which can be budgeted independently based on a company’s action plan for a future period. Collectively they result in a pro forma income statement that projects future net income.