Budgeting Flex budget confusion

topcat

Hi everyone,

I understand the basis of flexible budgets but just trying to get my head around this new part to them for me

"this method applies when sales volume is less than production volume 'flex the budget straight to the sales level bypassing the production level. This is both easier and better presentation method than showing inventory separately. Since you will be using marginal costing this provides the same costs as flexing to the production level and then deducting inventory valued at marginal costing "

Can not get my head around it Osborne budgeting page 151. Maybe someone will be able to put a different spin on this?

SandyHood

There are two approaches to flexed budgets when the volume produced is not the same as the volume sold.
The quote you have found takes the view that sales should be used. This is fine and fullfills the purpose more easily than the alternative.
You take each budgeted variable cost (and the variable part of any semi-variable costs) and divide by the budgeted units produced and multiply by the units sold to give you the cost of sales on an expense by expense basis (e.g. the flexed material cost would be the material cost of the units sold).
Fixed costs are not flexed.

If you took the other view, you would flex your material costs by taking the budgeted material cost, divide by the budgeted units produced and multiply by the actual units produced. You would then total all the variable production costs, divide by the number of units produced and multiply by the increase in the stock level and deduct the increase in the stock level to find the variable production cost part of the cost of sales.

If this continues to trouble you, let me know and I'll put the methods onto an attachment using an example. My email is below, I don't look at the forum every day.

topcat

Thank you very much if the book put it like the below i would have understood and have had more hair left

"You take each budgeted variable cost (and the variable part of any semi-variable costs) and divide by the budgeted units produced and multiply by the units sold to give you the cost of sales on an expense by expense basis (e.g. the flexed material cost would be the material cost of the units sold)."

SandyHood

Try this book (on the front page of my website): http://www.sandyhood.com/