Flexible budget and flexible budgetary control
Cost and Management Accounting · Unit I · Topic 10 of 18 · 4 min read
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1. Fixed and flexible budgets
A fixed budget is prepared for one level of activity and is not changed when actual activity differs. Comparing actual cost at 70% capacity with a budget for 100% tells management nothing useful. A flexible budget (CIMA) is “a budget which, by recognising different cost behaviour patterns, is designed to change as volume of activity changes.” It shows the cost allowed at each level, so actual cost can be compared with the cost that should have been incurred at the level actually achieved. That comparison is flexible budgetary control.
| Fixed budget | Flexible budget |
|---|---|
| One level of activity | A range of levels |
| Costs not classified by behaviour | Fixed, variable and semi-variable costs separated |
| Unrealistic comparison when output changes | Comparison at actual output |
| Suits stable conditions | Suits changing demand, seasonal trades, new products |
2. Steps in preparing a flexible budget
- Decide the range of activity and the levels (60%, 80%, 100% of capacity, or units, or labour hours).
- Classify every cost as fixed, variable or semi-variable.
- Split each semi-variable cost into its fixed and variable parts (given percentages, or the high-low method).
- Variable costs: per-unit rate × output at each level.
- Fixed costs: same total at every level (unless a step is given).
- Total the costs at each level; compute cost per unit, and profit if prices are given.
3. Solved: two outputs, element-wise cost per unit (BBA, January 2026, Q. 7)
Budgeted output 1,00,000 units; cost per unit: material 95, labour 50, variable production overhead 40, fixed production overhead 5, fixed administration 5, selling 10 (10% fixed), distribution 15 (20% fixed). Fixed totals: production 5,00,000, administration 5,00,000, selling 1,00,000, distribution 3,00,000. Variable selling Rs. 9, variable distribution Rs. 12.
| Item | 40,000 units Rs. | Per unit | 75,000 units Rs. | Per unit |
|---|---|---|---|---|
| Direct material | 38,00,000 | 95.00 | 71,25,000 | 95.00 |
| Direct labour | 20,00,000 | 50.00 | 37,50,000 | 50.00 |
| Variable production OH | 16,00,000 | 40.00 | 30,00,000 | 40.00 |
| Variable selling OH | 3,60,000 | 9.00 | 6,75,000 | 9.00 |
| Variable distribution OH | 4,80,000 | 12.00 | 9,00,000 | 12.00 |
| Variable cost | 82,40,000 | 206.00 | 1,54,50,000 | 206.00 |
| Fixed production OH | 5,00,000 | 12.50 | 5,00,000 | 6.67 |
| Fixed administration OH | 5,00,000 | 12.50 | 5,00,000 | 6.67 |
| Fixed selling OH | 1,00,000 | 2.50 | 1,00,000 | 1.33 |
| Fixed distribution OH | 3,00,000 | 7.50 | 3,00,000 | 4.00 |
| Fixed cost | 14,00,000 | 35.00 | 14,00,000 | 18.67 |
| Total cost | 96,40,000 | 241.00 | 1,68,50,000 | 224.67 |
Check: at 1,00,000 units cost per unit is 206 + 14 = 220, which is the sum of the given per-unit costs. Fixed cost per unit falls as output rises; that is the whole point of the exercise.
4. Solved: flexible budget with profit (BBA, June 2025)
At 50% capacity: 10,000 units; price 200; material 100; labour 30; factory overhead 30 (12 fixed); administration 20 (10 fixed). At 60% material rises 2% and price falls 2%; at 80% material rises 5% and price falls 5%. Fixed totals: factory 1,20,000, administration 1,00,000.
| Item | 50%: 10,000 | 60%: 12,000 | 80%: 16,000 |
|---|---|---|---|
| Sales (200 / 196 / 190) | 20,00,000 | 23,52,000 | 30,40,000 |
| Material (100 / 102 / 105) | 10,00,000 | 12,24,000 | 16,80,000 |
| Labour (30) | 3,00,000 | 3,60,000 | 4,80,000 |
| Variable factory OH (18) | 1,80,000 | 2,16,000 | 2,88,000 |
| Variable administration OH (10) | 1,00,000 | 1,20,000 | 1,60,000 |
| Fixed OH (1,20,000 + 1,00,000) | 2,20,000 | 2,20,000 | 2,20,000 |
| Total cost | 18,00,000 | 21,40,000 | 28,28,000 |
| Profit | 2,00,000 | 2,12,000 | 2,12,000 |
Comment: profit is the same at 60% and 80%, because the extra contribution from volume is eaten by the price cut and dearer material. Contribution per unit falls from 42 to 36 to 27.
5. Solved: overhead budget and rates (B.Com, January 2026)
At 60%: indirect material 6,000 and labour 18,000 (variable); electricity 30,000 (40% fixed); repairs 3,000 (80% fixed); depreciation 16,500, insurance 4,500, salaries 15,000 (fixed); total 93,000; labour hours 1,86,000. At 80% hours are 2,48,000 and variable items rise by one-third.
| Item | 60% Rs. | 80% Rs. |
|---|---|---|
| Indirect material | 6,000 | 8,000 |
| Indirect labour | 18,000 | 24,000 |
| Electricity: fixed 12,000 + variable 18,000 / 24,000 | 30,000 | 36,000 |
| Repairs: fixed 2,400 + variable 600 / 800 | 3,000 | 3,200 |
| Depreciation, insurance, salaries | 36,000 | 36,000 |
| Total | 93,000 | 1,07,200 |
| Rate per labour hour | 0.500 | 0.432 |
Others from the papers. BBA January 2026, Q. 9(c): 300 units at 60%; at 80% (400 units) material 40,000, labour 16,000, direct expenses 4,000, factory 16,000 + 32,000 = 48,000, administration 18,000 + 16,000 = 34,000; total 1,42,000 (Rs. 355 a unit, against 1,15,000 and Rs. 383.33 at 60%). B.Com 100-mark paper: variable cost Rs. 95 a unit and fixed 1,10,000, so total cost is 10,60,000, 8,70,000 and 6,80,000 at 10,000, 8,000 and 6,000 units (Rs. 106, 108.75 and 113.33 a unit).
How this is examined
Draw one column per level, list items in the order given, show fixed and variable parts of each semi-variable item, total, and give per-unit cost or the overhead rate. A one-line comment on why cost per unit falls earns a mark.
Now try the real questions: Cost and Management Accounting past question papers.