In those industries where the pattern of demand is stable, a fixed budget may be adequate, especially where the budget period is comparatively short. In such it is possible to forecast sales with a considerable degree of accurate are many undertakings where stable conditions are absent. In such fluctuations in output might lead to violent deviations from the budget. In such concerns it is usual to adopt the flexible budgetary technique.
A flexible budget is a budget, which is designed to change in accordance with the levels of activity actually attained. If flexible budgeting is adopted, a series adopts, would be, and compiled to cover the range of levels of activity possible. In such budgets division of costs and expenses into fixed and variable is extremely important.
The underlying principle of a flexible budget is that for, any given volume of business there should be some norm of expenditure and that norm should be known beforehand 10 provide a guideline to actual expenditure. To recognize this principle is to accept the fact the every business is dynamic, and ever-changing. It is futile to expect a business to conform to, a fixed, pre-conceived pattern. Preparation of flexible budgets result in the construction of a series of formula, one for each department or cost center. The formula for each account indicates the fixed amount and/or at variable rate. The fixed amount remains constant regardless of activity. The variable portion of the formula is a variable rate expressed in relation to a base such as direct labor hours, direct labor cost, or machine hours.