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Flexible Budgets: fixed and variable costs, static vs flexible, CVP analysis

1. Readings

· Read Ch. 22, 23, 24, 26, & 27 of Business Law: Legal Environment, Online Commerce, Business Ethics, and Interpersonal Issues.

2. Learning Team Assignment: Flexible Budgets

· Write a paper in which you discuss flexible budgets.

· 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.

· Format your paper according to APA standards.

· Submit your assignment as an attachment.

Solution Preview

Definition of flexible budget:
A flexible budget is a budget that is a function of one or more levels of activity. Thus, the budget depends on one or more measures of activity volume rather than being fixed in amount.

Definition of static budget:
Static budget is a budget that incorporates anticipated values about inputs and outputs that are conceived before the period in the question begins. It is also called fixed budget.

Static budget vs. flexible budget
Static budget is the budget which does not allow any changes. In static budget, the figures are based on the single level of activity i.e., for the particular volume of production and actual results are compared with the budgeted figures. If the company has budgeted sales, fixed cost and variable cost for 10000 units of production and if the company has produced and sold 9000m units, then the actual results of 9000 units will be compared with the static budgeted figures for 10000 units. Variances arising from comparing static budget with the actual results are called static budget variance. This variance may be favorable or unfavorable. Static budget is also called the original budget.

On the other hand, flexible budget which is also called the variable budget is prepared for the range of activities and not for sing le activity level. For example, flexible budget is prepared for the units of production from 8000 units to 12000 units and if the ...