Fixed and Flexible Budgeting

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FIXED AND FLEXIBLE

BUDGETING
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On the basis of flexibility the budget may
be classified into two categories namely
 Fixed or Static Budget
 Flexible Budget
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Fixed or Static Budget

According to ICWA, London- “Fixed Budget is a
budget which is designed to remain unchanged
irrespective of the level of activity actually
attained”.
The budget in which the objectives and targets are

fixed is known as fixed or static budget.
Prepared when? It is prepared after a long

discussion before the beginning of the year.
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In fixed budget preparation the essential

conditions are
 Business nature is not seasonal
 No effect of external factors on business conditions.
 Product demand is certain and fixed
 Regular issue of supply orders
 Regular supply of inputs
 Price stability trend is there

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Characteristics of a Fixed Budget

 Targets achievement is a must, as instructions issued
by the management authorities
 Fixed aim/objectives/targets of the business
firm/unit.
 It is prepared in normal conditions of business.
 It assumes that other factors will remain constant in

future.
z Merits- i. Time saving
ii. Easy to prepare
iii. Easy to control
iv. Easy to forecast about production and sales.
V .more accurately
Demerits--i. Based on wrong assumption of other things
remaining the same
ii. Change is not possible
iii. In accurate estimates and data
iv. Other factors have great impacts on sales & production

activity
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Flexible budget
according to ICWA London, “Flexible budget is a budget

which, by recognizing the difference between fixed,
semi- variable, and variable costs, is designed to change
in relation to the level of activity attained”.

Flexible budget is the budget in which adjustment is
possible according to change in business conditions.
Flexible budget is prepared for various capacity/activity
levels of production i.e. from minimum to maximum
level like- 10%, 20%, 30%, 40%, ………… 100%
z Flexible Budget Characteristics
 A Flexible budget consists of a series of budgets prepared in respect of
different levels of activity during a budget period.
 It can be changed and adjusted as per the changes in the business
conditions.
 Prepared in advance
 Prepared for various levels of activity
 Its nature is dynamic
 Concerned with a particular period of time
 Production possible at all levels of productions.

Advantages
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 Easy to calculate sales, cost, profits at various levels of production capacity.
 Helps in comparison of actual figure with the budget figures.
 Help in cost control by finding the variances in actual figures and budget figures. Steps
may be taken to minimum the variance.
 In flexible budget, adjustment is very simple according to change in business

conditions.
 It is very easy to know the effects of cost factors on business profits.
 It helps in determination of production level.
 It is prepared to free from the disadvantages of fixed budget.
 Know the impact of external environmental factors on the activities of business.

Demerits
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 Time consuming, requires more maintenance and

oversight
 Limits ability to plan in some areas when budget is
changing
 Less Discipline
 Enables cheating
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Difference between fixed and fexible buget
Basis for comparison Fixed budget Flexible budget
Meaning A fixed budget is a budget A flexible budget is a budget

that remains static that changes as per the
irrespective of the activity necessity of activity level.
level.
Whats its all about? The fixed budget doesn’t Flexible budget changes as
change as per the per the fluctuations of
fluctuations of business. business.
Nature z A fixed budget is always A flexible budget is very
static. dynamic.
Simplicity Pretty simple Quite complex
Ease of preparation It is easy to prepare a fixed It is quite tough to prepare a

budget. flexible budget since one
needs to prepare for all
situations.
Consequences The dissonance between the The dissonance between the

actual level and the budgeted actual level and the budgeted
level is quite high since there level is quite low.
is no similarity in activity
level.
Comparison Comparison is difficult Comparison is quite easy
z since the activity levels are since the activity levels are
different at the actual level quite similar.
and budgeted level.
Rigidity Pretty rigid, no fluctuation is Quite flexible, almost every

taken into account. fluctuation is taken into
account.
How is it estimated? A fixed budget is mostly A flexible budget is prepared

estimated on assumptions with realistic situations in
and anticipations. mind.
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Conclusion
 By comparing the fixed budget and flexible budget, we get
an idea about which one is more useful and more
applicable. Even if a fixed budget is elementary to
prepare, ideally, it’s not an excellent method of budgeting
to be precise; because fixed budgeting doesn’t leave
room for fluctuations.
 On the other hand, flexible budgeting is very much

adjustable to the situations of business. As a result, the
business doesn’t need to incur losses. That’s it’s
prudence to use flexible budgeting no matter what scale
of business you’re in
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Thankyou
Presented by
Saavi Goel
Mehak Nangia

Fixed and Flexible Budgeting

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FIXED AND FLEXIBLE

 Fixed or Static Budget

Fixed or Static Budget

The budget in which the objectives and targets are

Prepared when? It is prepared after a long

In fixed budget preparation the essential

 Business nature is not seasonal

 No effect of external factors on business conditions.

 Product demand is certain and fixed

 Regular issue of supply orders

 Regular supply of inputs

 Price stability trend is there

Characteristics of a Fixed Budget

 It assumes that other factors will remain constant in

ii. Change is not possible

iii. In accurate estimates and data

iv. Other factors have great impacts on sales & production

according to ICWA London, “Flexible budget is a budget

 Prepared for various levels of activity

 Its nature is dynamic

 Concerned with a particular period of time

 Production possible at all levels of productions.

 Helps in comparison of actual figure with the budget figures.

 In flexible budget, adjustment is very simple according to change in business

 It is very easy to know the effects of cost factors on business profits.

 It helps in determination of production level.

 It is prepared to free from the disadvantages of fixed budget.

 Know the impact of external environmental factors on the activities of business.

 Time consuming, requires more maintenance and

Basis for comparison Fixed budget Flexible budget

Meaning A fixed budget is a budget A flexible budget is a budget

Simplicity Pretty simple Quite complex

Ease of preparation It is easy to prepare a fixed It is quite tough to prepare a

Consequences The dissonance between the The dissonance between the

Rigidity Pretty rigid, no fluctuation is Quite flexible, almost every

How is it estimated? A fixed budget is mostly A flexible budget is prepared

 On the other hand, flexible budgeting is very much

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