The upcoming discussion will update you about the differences between fixed budget and flexible budget.
Difference # 1. Fixed Budget:
1. Costs are not classified according to their variability, i.e., fixed, variable and semi- variable.
2. Fixed budget is inflexible and remains the same irrespective of the volume of business activity.
3. Fixed budget assumes that conditions would remain static.
4. Accurate forecasting of results is difficult.
5. Actual and budgeted performances cannot be correctly compared if the volume of output differs.
6. This budget has a limited application and is ineffective as a tool for cost control.
7. All conditions will remain unaltered is an unrealistic expectation on the part of the management.
8. Costs cannot be ascertained if there is a change in the circumstances.
Difference # 2. Flexible Budget:
1. Costs are classified according to the nature of their variability.
2. Fixed budget can be suitably re-casted quickly to suit changed conditions.
3. Fixed budget is designed to change according to a change in the level of activity.
4. Flexible budget clearly shows the impact of various expenses on the operational aspect of the business.
5. Comparisons are realistic since the changed plan figures are placed against actual ones.
6. This budget has more applications and can be used as a tool for effective cost control.
7. Under flexible budgeting, series of fixed budgets are prepared for different levels of activity.
8. Cost can be easily ascertained at different levels of activity. The task of fixing prices becomes easy.