IGNOU : M.COM : MCO 5 : UNIT 10 : Q - 1. What are fixed and flexible budgets? Differentiate between these two.

Ans. FIXED BUDGETING

According to C.I.M.A., London, “a fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.” Thus, a budget prepared on the basis of a standard or fixed level of activity is known as a fixed budget. It does not change with the change in the level of activity. Therefore, it becomes an unrealistic yardstick in case the level of activity actually attained does not confirm to the one assumed for budgeting purposes. The management will not be in a position to assess the performance of different heads on the basis of budgets prepared by them because they can serve as yardsticks only when the actual level of activity corresponds to the budgeted level of activity. Fixed budget is useful when there is no significant variation between the budgeted output and the actual output. It does not consider variances due to changes in the volume. In the industries where the pattern of demand is stable a fixed budget may be adequate, especially where the budget period is comparatively short. In such concerns it is possible to forecast sales with a considerable degree of accuracy.

FLEXIBLE BUDGETING

Flexible budget, also known as variable or sliding sale budget, is a budget which is designed to furnish budgeted costs for any level of activity actually attained. Flexible budgeting technique may be employed to adjust other budgets according to current conditions arising out of seasonal variations or changes in the length of the working period etc.

According to C.I.M.A., London, “a flexible budget is a budget designed to change in accordance with the level of activity actually attained.” Thus, a budget prepared in a manner so as to give the budgeted cost for any level of activity is known as a flexible budget. Such a budget is prepared after considering the fixed and variable elements of cost and the changes that may be expected for each item at various levels of operations.

DIFFERENCE BETWEEN FIXED AND FLEXIBLE BUDGETING

The differences can be outlined as follows:

1) Fixed budgeting is inflexible and remains the same irrespective of the volume of business activity, whereas flexible budgeting can be suitably recast quickly to suit changed conditions.

2) Fixed budgeting assumes that conditions would remain static, whereas, flexible budgeting is designed to change according to a change in the level of activity.

3) Under fixed budgeting, costs are not classified according to fixed, variable and semi-variable, while, under flexible budgeting, costs are classified according to nature of their variability.

4) Under fixed budgeting, actual and budgeted performances can’t be correctly compared if the volume of output differs, while under flexible budgeting, comparisons are realistic since the changed plan figures are placed against actual ones.

5) Under fixed budgeting, cost cannot be ascertained if there is a change in the circumstances, while, under flexible budgeting, costs can easily be ascertained at different levels of activity. The task of fixing prices becomes smooth.