Question

In your own words, explain the meaning of ‘flexing the budget’ and why it is necessary.

Answer 1

The ‘flexing the budget’ refers to a process that involves identification of the behaviour of revenue and costs (variable, semi-variable, fixed, and step fixed); and applying these behaviours to different levels of output. The original budget will be revised to show the impact of variable elements, and step fixed costs at actual level of output. The ‘flexing the budget is necessary because when a budget has been flexed it can help in making a comparison of the compared with actual figures and determine the variances. By flexing the budget an organisation can focus to anticipate and accommodate its requirements. For example, a seasonal firm will create a flexible budget to anticipate changing levels of staff as customers come and go over the course of specified time frame.