FLEXIBLE BUDGETING

Budgeting is the process of designing, implementing and operating budgets. It is the process of budget
planning and preparation, budgetary control, and the related procedure. A budget is a document that
list all the expected revenue as well as intended expenditures for a period, usually one year.

A flexible budget is an improvement on the traditional static budget in that it makes adjustment to the
disadvantages of static budget. A static budget is based on the activity level of output planned at the
start of the budget period. When variances are computed from a static budget at the end of the period,
no adjustment is made to the budgeted amounts irrespective of the actual level of output in the budget
period.

A flexible budget is developed using budgeted revenue and cost amount based on the level of activity
achieved in the budget period. The key differences between flexible budget and static budget are the
use of actual output in the flexible budget.

STEPS TAKEN TO APPLY FLEXIBLE BUDGETING

The first step to be taken is to identify fixed cost component in electricity cost, the cost that will be
incurred on electricity when no activity is going on in the university. After identifying the cost, segregate
them into the budget model.

The next step is to determine the extent to which all variable cost changes as activity measures change.
The components of variable costs in this case will depend on the cost center in question. Following this
step is the creation of the budget model, where all fixed cost will be input as budgeted, and the variable
costs will be stated as a percentage of the relevant activity measures or as a cost per unit of the activity
measures

After the above step, the actual activity measures into the model after an accounting period has been
completed. The flexible budget's variable costs are updated as a result. The last step that is needed to
complete the process is to enter the resulting flexible budget into the accounting system for comparison
to actual expenses.

The comparison of actual result with the flexible budget tends to yield variances that are much more
relevant than those generated under static budget, since the actual result and the flexible budget are
based on same activity measure. The variance produced will likely be smaller and more actionable. By
applying flexible budgeting to electricity cost the university can easily identify what is causing electricity
cost to deviate from the budgeted and corrective measures can be taken.