Flexible Budget - the Relationship between Fixed and Variable Costs - Assignment Example

The paper “Flexible Budget - the Relationship between Fixed and Variable Costs" is a  potent example of an assignment on finance & accounting. Fixed cost is the constant cost that is acquired for a period of accounting within certain turnover and output limits which tend to stay unaffected due to the changes in the activity level. Fixed cost is considered as the expenses of a business that do not depend on the production level of the goods and the services of the business.  

The fixed costs can be classified in different divisions such as, ‘the time period classification’, ‘the volume classification’, ‘the joint classification’ and ‘the policy classification’. There are various kinds of fixed costs in a production process such as buildings, machinery and cost related to the individual finished products. The fixed cost can be considered as the period cost, and this period cost does not generate any further benefits, so fixed cost should not be incorporated with the unit cost of production (Lucey & Lucey, 2002). 

Variable Cost
Variable cost is the other element of the total cost. Variable costing is the income statement that considers the overhead cost for the manufacturing, based on a certain period compared to the per-unit basis. Variable costs are the only directly related costs to per unit production. For example, when leather is used to manufacture a bag, the amount of leather would come under the measurement of unit. All the costs related to the fixed overhead, the variable costs, the fixed costs for selling goods and the expenses for administration are allotted for each period, instead of putting it into inventory (Khan & Jain, 2003).

            The variable cost provides assistance to control the variable expenses, avoiding the random distribution or allotment of the fixed costs. The variable costing involves direct materials, the variable part of production overhead and direct labor (Khan & Jain, 2003).

Q.2. Differences between Static and Flexible Budgets

Static Budget
The static budget integrates the estimated values regarding outputs and inputs which are induced before the beginning of the financial period. Most of the time, the predictable value through the static budget is quite distinct from the actually received values. It is the budget that will remain unchanged throughout the whole financial period, once determined by the management of a firm. It is named as static budget due to the reason for developing the budget for a single (static) planned level of output for the period (Horngren, Datar, Foster, Rajan, & Ittner, 2009).

Flexible Budget
A flexible budget is a tool to evaluate the performance of a business activity. It is impossible to prepare a flexible budget before the financial period ends. The flexible budget is used to regulate the actually received budget with a static budget. It is arranged to show the comparison between the budgets. The flexible budget acts as a constraint to the static budget. It describes that the process of budgeting is very much useful if it can adapt to the changing conditions. A flexible budget can be prepared following certain steps such as determination of the cost of the budgeted variables, determination of the fixed cost of the budgeted level, determination of the actual output volume and determination of the budgeted information costs (Shim, Siegel, & Shim, 2011).