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Relationship Between Fixed and Variable Costs Used in a Flexible Budget

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

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Solution Summary

Your response answers the three questions and then giving you a sample static and flexible budget with four variable costs and two fixed costs so you can "see" how these all fit together. There are 381 words in the response but this is not written in paragraphs. The comments are short instructional ideas related to the problem.

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A few definitions:
Fixed costs do not change with activity.
Variable costs change with activity.
Static budget is the budget created at the beginning of the year and has to presume some level of activity in order to create the estimated costs.
Flexible budget is the static budget "updated" for the actual (rather than budgeted) level of activity.

Now, notice the flexible budget definition. What costs will be change when they are "updated?" Only the variable costs will change when you adjust the activity. Let me give you an example. Here is a static budget and actual results:

(see attached word document for better formatting)

Static Budget Actual
Machine-hours 35,000 38,000

Labor ...

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