Flexible Budgets

Budgets are usually used to evaluate performance after the fact, using a process known as variance analysis. Since some costs are variable with respect to output and some are fixed, changes in output will automatically lead to increases/decreases in costs absent any input from managers. Since static budgets reflect planned output rather than actual output, they are not a good basis of comparison to actual costs.

In order to use the budget as a control tool (i.e., to evaluate cost and revenue performance at the end of the period), budgets usually require revisions to reflect actual output during the period rather than planned output.

A flexible budget is designed to facilitate these revisions, as the budget is prepared with full consideration of variable costs, fixed costs, and the associated cost-volume relations.

Flexible budgets tell managers what costs should have been given the actual level of output.  This makes for a more equitable basis for comparison with actual costs, and makes variances easier to interpret.