How can you prepare a flexible budget? (2024)

The first step is to identify the fixed and variable costs of your business or project. Fixed costs are those that do not change with the level of activity, such as rent, insurance, or salaries. Variable costs are those that change proportionally with the level of activity, such as materials, labor, or utilities. You can use historical data, industry benchmarks, or estimates to classify your costs.

The next step is to calculate the budgeted variable cost per unit of output or activity. This is the amount of variable cost that you expect to incur for each unit that you produce or sell. You can use the formula: budgeted variable cost per unit = total budgeted variable cost / budgeted activity level. For example, if you expect to spend $10,000 on materials for 1,000 units, your budgeted variable cost per unit is $10.

The third step is to prepare the flexible budget formula, which is a mathematical expression that shows the relationship between the budgeted costs and the activity level. The formula has three components: fixed costs, variable costs, and activity level. You can use the formula: flexible budget = fixed costs + (variable cost per unit x activity level). For example, if your fixed costs are $5,000 and your variable cost per unit is $10, your flexible budget formula is: flexible budget = $5,000 + ($10 x activity level).

The final step is to apply the flexible budget formula to different activity levels that you want to compare or analyze. You can use the formula to calculate the budgeted costs for any level of output or sales that you expect or achieve. For example, if you want to compare the budgeted costs for 800, 1,000, and 1,200 units, you can use the formula to get: flexible budget for 800 units = $5,000 + ($10 x 800) = $13,000; flexible budget for 1,000 units = $5,000 + ($10 x 1,000) = $15,000; flexible budget for 1,200 units = $5,000 + ($10 x 1,200) = $17,000.

Choosing the best activity level for a flexible budget depends on your goals and assumptions. You can use the flexible budget to plan for different scenarios, such as best case, worst case, or expected case. You can also use the flexible budget to control and evaluate your actual performance, by comparing the budgeted costs with the actual costs for the same activity level. You can use the variance analysis to identify the causes and effects of the differences between the budgeted and actual costs. The best activity level for a flexible budget is the one that aligns with your strategic objectives and reflects your realistic expectations.

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