- Identify fixed costs. …
- Identify variable costs. …
- Determine how much your variable costs change. …
- Calculate your total overhead costs. …
- Create a budget. …
- Revisit and update your budget.
It is divided into two parts: the fixed cost and the fixed cost portion of the semi-variable cost. The variable cost and variable cost component of the semi-variable cost are the second. Cost estimates are provided by a flexible budget at various activity levels. Before creating a budget, it is also necessary to clearly classify the costs into different categories of fixed costs, semi-variable costs, and variable costs.
Flexible Budgeting
Why is a flexible budget at work important?
A flexible budget is crucial for the workplace because it can help you plan for unforeseen expenses. It’s also a useful method for making spending decisions based on how the company performs. Here are some examples of companies that could project spending using flexible budgets:
What is a flexible budget?
A flexible budget is one that takes cost variations into account. Fixed costs on a budget are costs that never change. Varying costs are costs that can change. A company with constant rent (a fixed cost) but variable inventory costs (a varying cost) based on sales would have a flexible budget. A flexible budget could be used by the company to help plan its finances.
How to find a flexible budget
The following actions can be taken to locate a flexible budget for a workplace:
1. Identify fixed costs
Finding fixed costs—expenses that will always be the same regardless of how well a business is performing—is the first step in developing a flexible budget. Here are some examples of fixed costs:
2. Identify variable costs
Once you have determined your fixed costs, you can determine your variable costs, which may change based on the volume of your production or service. Here is a list of examples of variable costs:
3. Determine how much your variable costs change
You can determine how much your variable costs fluctuate each month after noting your fixed and variable costs. There are several methods for calculating variable costs in the workplace.
One common calculation is the cost per unit of production. To calculate the variable cost per unit, divide the variable costs by the quantity of units. Next, perform the same calculation with fixed costs. Production, for instance, is a variable cost if it costs $5,000 for a business to produce 100 products. The price per unit is $50 when $5,000 is divided by 100, meaning that each product is produced at a cost of $50. You can scale your budget for various levels of production by performing a price per unit calculation.
With this information, you can find the total variable cost. Multiply the overall production output by the variable cost of each produced unit to arrive at this. For instance, if 1,000 products are produced overall and each product has a variable cost of $25, the total variable cost will be $25,000
You can also determine the typical variable costs unconnected to production. You can add up the costs and divide by the number of months, for instance, if the company’s utilities cost $250, $300, and $200 over the course of a quarter. In this instance, $750 divided by three equals $250, indicating that the typical variable utility cost is $250 per month.
4. Calculate your total overhead costs
Overhead expenses are recurring costs of doing business that are unrelated to the price of producing goods directly. The costs that don’t directly relate to production should be noted in order to calculate your total overhead expenses. Decide which costs are variable and which are fixed next. Your variable overhead costs will alter in your final flexible budget calculations as your output changes, but your fixed overhead costs won’t change.
Here are some examples of overhead costs:
5. Create a budget
Your budget can include your fixed costs, variable costs, and the variance between them.
There are a few ways you can design your budget. With a separate column for variance, you can include fixed and variable costs as set numbers in your budget. You could also represent the portion of the budget that you anticipate the variable costs to eat up using percentages. Columns displaying variable costs for various benchmarks, such as the amount of income you achieve, are another way to design the budget. To complete the budget, you can list totals for fixed costs, variable costs, and overall overhead costs.
Make sure your budget is understandable to a third party, however you choose to present your numbers, in case you need to use it for accounting or auditing purposes.
6. Revisit and update your budget
After you’ve started using your budget, make periodic updates to reflect any adjustments to the variable cost percentages that will improve their accuracy. A flexible budget should be reviewed at least once every quarter or whenever the company experiences significant budgetary changes. This can assist you in continuing to make wise financial decisions for your place of business.
Flexible budget example
A company sells a product for $20 per unit. The business typically sells 100 items per month, but it has the capacity to sell up to 300 items per month. The company needs a budget that adapts to its output. Here is an illustration of how the company’s flexible budget might appear:
Monthly flexible budget for a company
FAQ
How is flexible budget calculated?
The calculation formula for this method is as follows: Flexible budget= Fixed cost + (actual unit of activity x variable cost per unit of activity).
Why do we calculate flexible budget?
When revenue or other activity figures have not yet been finalized, flexible budgeting can be used to more easily update a budget. This strategy requires managers to approve all fixed expenses as well as variable expenses expressed as a percentage of revenues or other activity measures.
What is a flexible budget example?
A flexible budget will include lines for different amounts. For instance, if you produce 100 widgets each month, your variable administrative costs could be $200 each month. But if you produce 200 widgets per month, your variable administrative costs would rise to $400.
What is the flexible budget amount?
First, a flexible budget is one in which certain amounts can change according to the level of activity. The difference between an actual amount and the amount permitted by the flexible budget is known as a flexible budget variance.
