Friday, June 17, 2011

Describe the characteristics of a flexible budget?

Describe the characteristics of a flexible budget?
A budget may be defined as a quantitative expression of a business plan for a specified future period, usually a year. It is simply a financial forecast for a future period. A budget is a short-term financial plan. It is an action plan to guide managers in achieving the objectives of a firm. A budget is a comprehensive and coordinate plan, expressed in financial terms, for the operations and resources of an enterprise for some specific period in the future.
The Flexible budget is designed to change in accordance with the level of activity attained. Thus, when a budget is prepared in such a manner that the budgeted cost for any level of activity is available, it is termed as flexible budget. Such a budget is prepared after considering fixed and variable elements of cost and the changes that may be expected for each item at various levels of operations. Flexible budgeting is desirable in many cases such as where because of the nature of business, sales are unpredictable, where the venture is new and it is difficult to predict the demand, where the business is subject to the vagaries of nature, such as soft drinks, etc.
The basic characteristics of a flexible budget are :
>   It is a comprehensive and coordinated plan in the sense that all activities and operations are considered when it is prepared. It is a budget of the enterprise as a whole. Budgets are indeed prepared for various segments of the enterprise, but they are components of the total budget-the master budget. The comprehensive or master budget is prepared after coordinating budgets for various segments of the enterprise. If budgets for various segments of the enterprise are not prepared jointly and in harmony with each other, the master budget will lose much of its importance and may even prove to be harmful in realising the firms' expectations.
>   It is expressed in financial terms. For operational purposes, a budget is alv/ays quantified in financial terms. Initially the budgets may be developed in terms of

varieties of quantities, but finally they must be expressed in the money unit. For example, purchase and production budgets will involve units of raw materials and finished products respectively, the labour budget will involve men and labour hours, or the sales budget may involve territories and customers to be served. But a coordinated and comprehensive budget can be developed only when all these budgets are expressed in some common denominator; the money unit undoubtedly serves as the common denominator.
>   It is a plan for the firms' operations and resources. A budget is a mechanism to plan for the firms' all operations or activities. Two aspects of every operation are: revenue and expenses. The budget must plan for and quantify revenues and expenses related to a specific operation. Planning should not only be done for revenues and expenses, but the resources necessary to carry out operations should also be planned. The planning of resources will include planning for assets and sources of funds.
>   It is a future plan for a specified period. Time dimension must be added to a budget. A budget is meaningful only when it is related to a specified period of time; the budget estimates will be relevant only for some specific period. For example, a production target of 10,00,000 units or a profit target of Rs. 50,00,000 has no meaning unless it is stated when these targets have to be met.
>   Flexibility : Budgets are generally prepared by keeping a certain level of activity as the target. All the functional budgets are based on that planned level of activity. A flexible budget is prepared by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output or turnover and is designed to change appropriately with such fluctuations.
b) "For Private sector' budgets are important in profit planning, but budget are costly for not-for-Profit organisations" Respond.
A firm should be managed effectively and efficiently. This implies that the firm should be able to achieve its objectives by minimising the use of resources. Thus managing implies coordination and control of the efforts of the firm for achieving the organisational objectives. The process of managing is facilitated when management charts its future course of action in advance, and takes decisions in a professional manner, utilising the individual and group efforts in a coordinated and rational manner. One systematic approach for attaining effective management performance is budgeting.
One should not consider budgets or budgetary control as something rigid or a straight] acket. It is one of the systems whereby the organisation is made both dynamic and cohesive, through the process of targets, achievement of which will mean progress; of allowing a good deal of freedom of action within the delegated field to executives and of seeing to it that all concerned will work in a concerted manner for achieving the firm's objectives. There is always a good scope for initiative and drive but not for recklessness
or too much caution. It is budgeting and budgetary control that can ensure that decentralisation of authority can be introduced and yet seeing to it that the whole organisation will move towards the achievement of its objectives smoothly.
It is a tool of great potency for infusing forward looking dynamism and for harnessing the energies of people at all levels. For this process of budgeting the degree of sincerity behind the whole exercise is of the utmost importance. If the persons working in an organisation are given the challenge of thinking out precisely what more can be done and how, they will realise that a tribute is being paid both to their intelligence and honesty of purpose.
In budgeting, both the financial and physical aspects are incorporated into the budget. Budgeting may also present the operations of an organisation in terms of functions, programmes, activities, and projects. For instance, in performance budgeting, precise detailment of job to be performed or services to be rendered is done. Secondly, the budget is prepared in terms of functional categories and their sub-division into programmes, activities, and projects. Thirdly, the budget becomes a comprehensive document. Since the financial and physical results are interwoven, it facilitates management control.
Whereas budgeting is important in profit planning for private sector, for not-for-profit organisations it is a systematic and formalised approach for stating and communicating the firms' expectations and accomplishing the planning, coordination, and control responsibilities of management in such a way as to maximise the use of given resources. For such organisations it is a management technique which provides a framework for implementing such fundamental aspects of scientific management as management by objectives, effective communication, participative management, dynamic control, continuous feedback, responsibility accounting, management by exception and managerial flexibility.
For such organisations it at least helps in stating firms' expectations or goals in formal terms to avoid confusion and to facilitate their attainability, it helps in communicating expectation to all concerned with the management of the firm so that they are understood, supported and implemented, it provides a detailed plan of action for reducing uncertainty and for the proper direction of individual and group efforts to achieve goals, it helps in coordinating activities and efforts in such a way that the use of resources is maximised, it provides a means of measuring and controlling the performance of individuals and units and supplies information on the basis of which the necessary corrective action can be taken.
Hence, we may conclude that budgeting should not be purely viewed from the financial benefits it brings to the organisation rather the more sophisticated and much more valued gains of it should be recognised and given adequate weightage.


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updated till june 2011