Compare and contrast the fixed and flexible budgets - Assignment Example

However, in unstable business scenario, flexible budget is always more relevant as it helps the business to effectively manage possible changes in the business environment, which would be hazardous if not well managed. Therefore, budget managers are usually faced with the task of adopting the right type of budget for their organisations depending on business situation. This paper explores fixed and flexible budgets, their differences, preparation procedures and functions. A fixed budget (static budget), is a type of budget that remains unchanged over the budget period regardless of changes in the level of activity of the organisation.

A fixed budget is “prepared of for one level of activity for a definite time period” (Dutta 2004 p. 25). On the contrary, a flexible budget is a budget which is designed to change with changes in activity level. It is also referred to as variable budget because it takes into account cost behaviour, such as fixed and variable costs, in connection with changes in output level or turnover (Weygandt, Kieso & Kimmel 2010). A fixed budget remains constant relative to the variation in the actual level of activity attained.

This makes it inflexible. On the other hand, a flexible budget changes with the variation in the level of actual activity, which makes it flexible (Tulsian & Tulsian 2005). A fixed budget is developed based on one level of activity and relies on the assumption that no change will occur in the prevailing circumstances, which is impractical. On the other hand, a flexible budget is based on various levels of activity (Weygandt, Kieso & Kimmel 2010). In a fixed budget, all costs are related to a single level of activity.

As such, variance analysis fails to provide valuable information about cost differences. On contrary, flexible budget analyses each cost on the ground of cost behaviour and thus gives important information about cost variances (Tulsian & Tulsian 2005). Under fixed budgets, the comparison of