Question one: static, flexible and activity based budgeting
A flexible budget incorporates elements of change in the level of activities of the firm. The budget allows for its application even in the events the level of activity deviates substantially from the initial expected level of activity. On the other hand, the static budget is geared toward one level of activity. As such, the budget does not find application in scenarios where the activities deviate substantially from the expected level of activity. Activity based budgeting, on the other hand, employs the process of budgeting through the authorization of the activities which facilitate the attainment of the budgeted activities. The process, therefore, requires the justification of the contribution of the activity towards the achievement of budgeted objectives before it could get funded.
The three budgeting systems suffice for different purposes. The flexible budget enables the flexing of the level of activities. This is used by the cost accountants to estimate the costs and expenses incurred upon the deviation of activity from the expected levels. For example, the flexible budget can be used to compute the costs of idle labor in the event materials are not fully available. Through the flexible budgets, cost accountants are able to compute the likely benefits from pursuing a number of options such as subcontracting. On the other hand, the static budget provides certainty to the firm. This is because it conservatively emphasizes on the need to conform to the set standards. The static budget is used as the benchmark for organizations that perform routine work. In these organizations, the routine nature of work minimizes deviations from the budgeted level of activities. On the other hand, activity based budgeting enables the firm to attain discipline and control on the pursuit of budgetary objectives. The activities funded must be justified before being approved ensuring the process is effective and controlled.
Question 2: Flexible budget
A flexible budget essentially allows a wider range and level of activities by the organization. It allows the managers a mechanism through which they can construct a new budget if and when the activities cause deviations from the expected outcomes. The original budget would be flexed to come up with a new budget that would be used to compare against the actual results. The reasoning that informs such action arises from the fact that the behavior of costs can be studied and analyzed over a wide range. The accountants separate the total costs into their three constituent groups, the variable, fixed and mixed costs. The variable costs form a vital portion of the flexible budget as it is that group that occasion the change from the original expected outcomes to the actual outcomes. The nature of change of costs in a given range is studied. The result is compared against the actual outcomes to obtain the variances. Flexible budgets are considered realistic as they incorporate the values that are commensurate to the level of activity. The comparison of the actual expected level of activity to the actual level of activity leads to more realistic outcomes. They have more economic sense and significance, especially, in decision making.
The main advantage that accrues during the use of flexible budgets is the ability to identify the effects of changes in variables on the production. For example, accounts can identify the effects of lesser input of a particular material in the production process. On the other hand, the flexible budgets in their flexibility may allow excess deviations from the original planed budget. This would be detrimental on the attainment of the firm’s objectives.
Kinney, M. R., & Raiborn, C. A. (2012). Cost Accounting:Foundations and Evolutions. New York: Cengage Learning.
Vanderbeck, E. J. (2012). Principles of Cost Accounting. New York: Cengage Learning.