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Flexible Budgets

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Explain the relationship between fixed and variable costs used in a flexible budget.
Discuss the differences between static and flexible budgets and how a flexible budget lends itself to a cost-volume-profit analysis.

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Solution Summary

Your response is 322 words answering the three questions and then giving you a sample static and flexible budget so you see how this works.

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A flexible budget adjusts the beginning of the year budget (static budget) to the actual activity levels. The only items that are adjusted are variable costs because they are the only ones that are "sensitive" to activity!

Static budgets are the beginning of the year budgets and are created based on expected activity levels. The flexible budget is the static budget "updated" for the actual activity level that occurred during the period.

A flexible budget lends itself to CVP analysis because it separates the variable from the fixed costs, permitting the ...

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