A flexible budget is a budget is a somewhat complex and handy budget, although it doesn’t have to be difficult to understand or implement.
The advantage of a flexible budget is that it reacts or adjusts to the changes in the amount of activity in any given circumstance.
This flexibility gives it an advantage over a static budget, which stays the same no matter what is happening to affect the given circumstances.
It works like this. If a business knows that the cost of its power and supplies for a project are around £20 per service, and it also knows that the office supervision, depreciation, and other fixed costs are approximately £20,000 per month and in a typical month, the operating hours run to between 4,000 and 7,000 hours, then the flexible budget would be costs £20,000 plus £20 per project.
By using a flexible budget the office manager can adjust the amount needed depending on the hours worked on the project. For instance the more hours needed, for example 5,000 hours during say April and the office is running to full capacity, then the budget would be £120,000, using the formula £20k fixed and £20 x 5. Or if in December for example when working days are lost to holidays, the hours dedicated to the project are down to 2,000 hours only £60,000 is needed to cover the costs.
So it makes perfect sense to allow the office manager the flexibility to budget so if more man hours are needed to work on a project then they can allow for that or, indeed reduce as needed.
A flexible budget will allow allows for unexpected costs while knowing the basic cost and so allows for better planning and controlling a projects cost than a static budget that has no flexibility.
