A flexible budget takes the variable revenues and costs as they are planned in the master budget and adjusts the master budget amounts to what they would have been if the actual volume achieved had been used in preparing the budget. Flexible budgets show how variable costs change at different production levels. Total budgeted fixed costs are the same in both the static budget and the flexible budget, since fixed costs are not dependent in total upon capacity usage. Since fixed costs are often determined before the budget is developed, budgeted fixed costs are generally fairly realistic.
Variance analysis, and specifically the fixed overhead production-volume variance, measures the variance due to the actual production level being different from the production capacity level used to calculate the budgeted fixed overhead cost to be applied to each unit produced. The production-volume variance, not the flexible budget, provides a better understanding of the result of this difference. Total budgeted fixed costs are the same in both the static budget and the flexible budget, since fixed costs are not dependent in total upon capacity usage.
A flexible budget takes the variable revenues and costs as they are planned in the master budget and adjusts the master budget amounts to what they would have been if the actual volume achieved had been used in preparing the budget. A flexible budget prepared in addition to the master budget that is used exclusively for reporting on variances other than those due to volume differences allows management to focus on the variances that may be caused by production or administrative problems that need attention.
Fixed and variable costs are not interchangeable within the organization. Simply using more raw materials will not eliminate the need to pay rent, for example.
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