Discussion Week 3

Page 1 of 1 Accounting III

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Flexible Budgets Flexible Budgets. Budgeting has proven to be a very important part of planning in any organization. A static budget is prepared at the beginning of a period and is a budget written based on single activity level. For example, we might plan to make 5000 units and we will build a budget based on that number of units. The problem with this type of budget occurs if we come back with 6000 units. If we compare our cost as 6000 units to the cost we projected at 5000 units, it will appear that the company is not doing well because they will have higher cost in most likely all projections. However, the cost we are comparing to, are not valid. The solution to this problem is the development of the flexible budget. It is prepared for activities in the relevant range. These budgets show cost that should have been incurred at the actual level of activity. In a flexible budget, the actual cost are compared to what the cost should have been at the activity level. Per unit cost for any variable cost become critical, so we can apply those rates to any level of activity.