Answer: Cash budget is an estimation of the cash inflows and outflows, which can be done either for business or individual. On the other hand, a flexible budget is one which varies with the level of activity (as variable costs for a firm vary during given period).
Full Answer
What is a flexflexible budget?
Flexible budget is a budget that is mostly used as a static budget A Static Budget A static budget is one that anticipates all revenue and expenses which will occur during a particular period, with changes in the level of production/sales or any other major factor having no effect on the budgeted data. It is also known as a fixed budget.
What is budgeted cash flow?
It is an estimate of the cash receipts expected in the future over the budget period, the expenditure to be incurred in cash, and finally, the cash balance with the company at the end of the period.
What is the difference between fixed and flexible budgets?
A flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity. How to Provide Attribution? Article Link to be Hyperlinked When preparing a Flexible budget, managers are forced to consider the different scenarios and their responses to them.
How do you calculate a flexible budget?
Flexible budget= Fixed cost + (actual unit of activity x variable cost per unit of activity). We can use any of these three methods for the preparation of the budget. But, the method selected must serve the purpose of the development of such a budget. August 12, 2020.
What is flexible and cash budget?
Answer: Cash budget is an estimation of the cash inflows and outflows, which can be done either for business or individual. On the other hand, a flexible budget is one which varies with the level of activity (as variable costs for a firm vary during given period).
What is a flexible budget?
A flexible budget adjusts based on changes in actual revenue or other activities. The result is a budget that is fairly closely aligned with actual results. This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels.
What is a cash budget?
A cash budget is an estimation of cash inflows and outflows over a specific period of time. Cash budgets are useful in that they can be produced for long-term and short-term goals, sometimes for as little as one week.
What is the difference between budget and cash budget?
The key difference between master budget and cash budget is that master budget is a financial forecast that consists of all the revenues and expenditure whereas cash budget records the predicted results of cash inflows and outflows for the accounting period.
What are the three types of budgets?
Depending on the feasibility of these estimates, Budgets are of three types -- balanced budget, surplus budget and deficit budget.
Who uses a flexible budget?
A flexible budget works for people who work on commission or who have expenses that vary widely from month to month. The important aspect of using a flexible budget is to spend equal to or less than the income each month.
Who prepares cash budget?
Therefore, the head of the finance function – the chief financial officer, controller or senior accountant – manages the company's cash budget.
What is purpose of cash budget?
A cash budget details a company's cash inflow and outflow during a specified budget period, such as a month, quarter or year. Its primary purpose is to provide the status of the company's cash position at any point of time.
What is cash budget and its importance?
A cash budget is very important, especially for smaller companies. It allows a company to establish the amount of credit that it can extend to customers without having problems with liquidity. A cash budget helps avoid a shortage of cash during periods in which a company encounters a high number of expenses.
What is cash budget with example?
Example of a Cash Budget At a retail price of $60 per pair, the company estimates sales of 5,000 pairs of shoes each month. ABC forecasts that 80% of the cash from these sales will be collected in the month following the sale and the other 20% will be collected two months after the sale.
What are the types of cash budget?
The cash budget is divided into four sections: Cash receipts: lists all cash inflows excluding cash received from financing. Cash disbursements: consists of all cash payments excluding repayments of principal and interest.
What are the features of flexible budget?
Main Features of Flexible BudgetThe flexible budget covers a range of activities,A flexible budget is easy to change according to variations of production and sales levels.Flexible budget facilitates performance measurement and evaluation.It takes into account the changes in the volume of activity.More items...
What is the main purpose of a flexible budget?
The flexible budget can be used for the determination of budgeted sales, costs, and profits at different activity levels. It helps the management to decide the level of output to be produced in order to generate profits for the business based on budgeted cost at different activity levels and budgeted sales.
What is a flexible budget quizlet?
What is a flexible budget? A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period. -takes into account how changes in activity affect costs.
What is flexible budget and its importance?
The main importance of flexible budget is that it reflects the expenditure appropriate to various levels of output. The expenditure established through a flexible budget is suitable for comparison of the actual expenditure incurred with the budgeted level applicable for that particular level of activity attained.
What is flexible budget and its advantages?
In a flexible budget, there is no comparison of budgeted to actual revenues, since the two numbers are the same. The model is designed to match actual expenses to expected expenses, not to compare revenue levels. There is no way to highlight whether actual revenues are above or below expectations.
What is flexible budget?
Flexible budget is a budget that is mostly used as a static budget. A Static Budget A static budget is one that anticipates all revenue and expenses which will occur during a particular period, with changes in the level of production/sales or any other major factor having no effect on the budgeted data.
Why is flexible budget important?
A flexible budget is much more realistic than fixed budgets since it gives emphasis on cost behavior at different levels of activity.
When preparing a flexible budget, managers are forced to consider the different scenarios and their responses to them?
Thus, for a number of different situations, managers will have calculated their costs and revenues. If an unexpected event does occur, changing the level of activity, the management will be better prepared.
Can a budget be re-casted?
This budget can be re-casted on the basis of the activity levels. It is not rigid.
Is a flexible budget accurate?
A flexible budget depends very much upon a forecast of the past business performance. So the historical information used needs to be accurate.
Why is a flexible budget useful?
For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible budget is a more useful tool when measuring a manager's efficiency.
Why is a flexible budget more useful than a static budget?
The flexible budget is more sophisticated and useful than a static budget. (The static budget amounts do not change. They remain unchanged from the amounts established at the time that the static budget was prepared and approved.) For costs that vary with volume or activity, the flexible budget will flex because the budget will include ...
What is a cash budget?
A Cash budget represents the expected future cash flow of an organization over a defined period of time. It is an estimate of the cash receipts expected in the future over the budget period, the expenditure to be incurred in cash, and finally, the cash balance with the company at the end of the period.
How is the Cash Budget Prepared?
A cash budget takes shape after the preparation of other budgets like sales, purchases, etc. These budgets give a clear picture of the cash drivers in the company and by how much. This budget mainly comprises of three parts-
How to forecast cash balance?
The cash balance forecast is done by deduction of the total cash outflows from the cash inflows over a period of time, maybe a week or a month, as the management feels appropriate . If the budget foresees a high surplus of cash balance, the management may use it appropriately by preparing a financing budget. It becomes the basis for deciding suitable investments for the company. The management may decide to invest in land, plant, and machinery, invest in some other fixed asset, or may allocate the surplus funds to other functions within the organization as per need.
Why is a cash budget important?
Helpful in Proper Planning. The cash budget helps the management in proper planning. It will know in advance the possible cash surplus or deficit scenario in near future. In both cases, it can stay prepared in advance to avoid sudden crisis or loss of investment opportunity.
What is a consistent surplus budget?
A consistent surplus budget may signal the management to look for other investment opportunities. It can also decide to raise the scale of its own operations. On the other hand, a cash deficit situation can alert it to take care of its expenditures. Also, it can timely arrange funds by way of equity or debt.
What is considered in preparing a budget?
These outflows will include all the cash payments made for purchases of raw materials, inputs or semi-finished products, consumables, any cash to be paid for the purchase of a fixed asset during the period, provisions for repairs and maintenance, labor payments, selling and administrative expenses, printing, and stationery requirements, dividend distribution, etc.
What is included in a cash budget?
One important thing to be taken into account is that a cash budget includes only the transactions where actual cash will come in or go out. For example, it will not include a credit sale for which cash or payment has not yet been received. Also, it does not include expenses like depreciation or amortization since no exchange of cash takes place while recording any of the two.
What are Flexible Budgets?
A flexible budget is a budget or financial plan of estimated cost and revenue for different levels of output. The variation happens due to the change in the volume or level of activity.
How much is the flexible budget for April?
Therefore for the month of April — flexible Budget = $35,000 + ($10 x 4000) = $75,000
What does the vertical rows represent in a budget?
And, the vertical rows represent the budgeted estimates against the different levels of activity or output. The expenses categorized into fixed, variable, and semi- variable costs.
Is flexible budget important?
The flexible budget has immense importance, but it has certain disadvantages also as listed below: The preparation of a flexible budget requires skilled workers. And their availability is a crucial factor in opting for a flexible budget. It is dependent on proper accounting disclosure.
Is flexible cost relatable to budget cost?
Fixed and variable cost determination happens on an arbitrary basis. Hence flexible costs are less relatable to the correct budget cost of the level of activity.
How are flexible budgets assigned?
Flexible budgets are assigned to the activities by dividing them into fixed and variable costs. With this approach each activity can change the level of actual results; hence the budgeting can also be changed and adjusted.
Why are flexible budgets important?
Flexible budgets allow adjusting at each activity level and helping management achieve targets.
What are the different types of budgets?
Fixed budgets and Flexible budgets. By budgeting approach, a budget can be categorized into four broad categories: 1 Incremental budgets 2 Zero-based budgets 3 Activity- based budgets 4 rolling budgets
What are the two categories of budgets?
By nature or characteristics budgets can be divided into two categories: Fixed budgets and Flexible budgets. By budgeting approach, a budget can be categorized into four broad categories: Incremental budgets. Zero-based budgets.
Why is budgeting important in overheads?
Budgeting for activities in overheads can provide management useful insights about the total costs and profitability of a product. This method of budgeting is particularly useful in manufacturing facilities with various products and levels of production.
How long are budgets prepared?
Traditionally, budgets are prepared for one year or longer terms. A Fast-changing business environment demands quick responses to market changes. Often a seasonal demand or new competitor’s entrant compels management to change the production levels.
What is Closely Adapted from Activity Based Costing Method?
Closely adapted from the activity-based costing method, that takes into account the variable overhead costs. It can be defined as “a budgeting method based on activity level and using cost drivers to identify variances”.
Static and Flexible budgets Definition
Static budget is set at the beginning of a budgeting period and that is general to only one level of activity. It is adjusted for the actual level of production and it is not suited for performance measurement. A company "fixes" budgets based on circumstances. A budget prepared for multiple levels of sales volume is called a flexible budget.
Overview of Static And Flexible Budgets
A static budget is the original budget that is prepared by the management based on a project level of output and the static budget pertains to a singular level of activity.
Budgeting
Budget is simply planning and developing the financial picture of a business. It is a plan or forecast of the anticipated results of a business for a specified task.
Sales Variance
Sales variance is the difference between the expected units to be sold and the actual number of units sold.
Actual Variance
The actual variance can be defined as the difference between sthe tandard costs and the actual amount that was sold. Toward the end of an accounting period, the actual results can be compared with the budget.
