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Fixed, flexed, flexible: what’s the difference?

How do companies budget to reflect different potential levels of output? Watch this video to learn more.

Most of us will have a weekly budget for food shopping, even if we keep it in our head rather than writing it down. But what happens if a relative invites themselves to stay? Or if someone who usually lives with us goes away for a week?

Companies may also experience changing circumstances – so how can they create a budget that allows them to respond? The answer lies in flexible budgets, as the Kaplan tutor explains in this video.

With a fixed budget, the company prepares the budget based on one level of activity – maybe they will base it on producing 10,000 units.

But they might choose to create additional budgets as well, allowing them to have a flexible budget. These additional budgets will reflect different production levels – perhaps 8,000 and 12,000 units – and also include any changes in sales levels and costs needed to reflect the different production levels.

If the actual activity is different, they can use the calculations used to create the flexible budget to create a flexed budget based on the actual level of activity.

Budgetary control is much more effective when we use a flexible or flexed budget rather than a fixed budget.

We’ll use the next step to walk through an example.

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Budget Forecasting, Costing, and Variances

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