Sheridan McKeever (01 Accountancy)

Flexible vs Master Budgets in Accounting

Many different types of budgets are prepared in the act of financial planning for a

company. The flexible budget and master budget are both budgets commonly used by companies

across the globe. Though they are both financial budgets, they are used for different purposes and

have unique advantages and disadvantages.

Flexible Budget

According to the notes provided in class, a flexible budget is “a budget used to account

for the changes in the costs and revenues due to changes in the activity level” throughout the

accounting period. It accounts and adjusts for the unpredictability of running and operating a

business and allows for businesses to adapt to changing external factors. In terms of revenues

and expenses, a flexible budget estimates the expected revenues and expenses based on the

actual level of activity that occurred in the accounting period.

There are several advantages to preparing a flexible budget in addition to a static budget

since it is based on actual activity measures rather than estimated activity levels. One big

advantage is that it enables what the class notes refer to as “apples-to-apples” comparisons. This

means it allows managers and other business executives to compare numbers from the flexible

budget to those of the planning budget and the actual results that came out of the accounting

period (NetSuite). By comparing these budgets, managers can see activity variances between the

flexible budget and the planning budget and/or the actual results of the fiscal period and can

make adjustments to make operations more efficient. Another advantage of the flexible budget is

that it allows for unpredictable circumstances. There is no way to completely predict what kind

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of external factors will affect activity levels throughout the year so flexible budgets take that into

account and allow the budget to be updated periodically with real activity level numbers (Bragg).

Flexible budgets also act as a good tool to evaluate the performance of managers since they are

based on activity levels. Managers can be evaluated based on the activity and spending variances

and how they choose to address any issues that may have been revealed in comparing the flexible

budget to the planning budget and the actual results (NetSuite).

Though there are several advantages of flexible budgets, they also come with some

disadvantages. The biggest of these is the fact that flexible budgets are very time-consuming.

They require constant monitoring and updates which means they require more manpower to

oversee and maintain them. Since they require more research, data analysis, and monitoring, they

can cost more to implement than other budgets. Another big disadvantage is that the flexible

budget assigns all costs to either fixed or variable, which is not always the case (Bragg).

Master Budget

A company’s master budget is its central financial planning document that contains all

“low-level” budgets including a sales budget, direct labor and materials budgets, and other

financial statements. The budgets included in the master budgets are as follows: the direct labor

budget, direct materials budget, ending finished goods budget, manufacturing overhead budget,

production budget, sales budget, and selling and administrative expense budget. The master

budget typically covers a full fiscal year and is prepared in a monthly or quarterly format.

Management uses the master budget as a central planning tool to refer to when making decisions

regarding activities or other aspects of operations. Like the flexible budget, it can also be used to

judge the performance of managers (Bragg).

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 There are advantages and disadvantages to the master budget as well. One big advantage

is that it compiles all of the smaller budgets into one large financial summary allowing somewhat

of an overview of a company’s finances. Since it shows a company’s overall financial standing, it

makes it easier to see if there are any problem areas within specific departments and allows

managers to plan accordingly and correct the issues. A disadvantage of the master budget is the

lack of specifics since it is a collective summary of all budgets. It is also difficult to update as it

has many categories and data included (Bragg).

In conclusion, both flexible and master budgets play vital roles in a company’s success.

They are both very useful in their own unique situations and can both be used in evaluating the

performance of managerial staff. Though there are some disadvantages to both budgets,

ultimately their pros outweigh their cons.

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 Works Cited

Bragg, S. (2023, November 22). Master budget definition. AccountingTools.

https://www.accountingtools.com/articles/master-budget

Bragg, S. (2023a, November 22). Flexible budget definition. AccountingTools.

https://www.accountingtools.com/articles/flexible-budget

NetSuite. What are flexible budgets? 4 best practices. Oracle NetSuite.

https://www.netsuite.com/portal/resource/articles/financial-management/flexible-

budget.shtml