What is the Difference Between Flexible Budget and Fixed Budget?

The main difference between a flexible budget and a fixed budget lies in their ability to adapt to changes in activity levels or business conditions. Here are the key differences between the two:

Fixed Budget:

• Remains static irrespective of the activity level or output level.
• Doesn't change due to any change in activity level or output level.
• Simplistic and easy to understand.
• Takes comparatively little time to prepare.
• Suitable for micro-enterprises but not advantageous for medium and large enterprises.
• Estimated on past data and management's anticipation regarding future events.

Flexible Budget:

• Changes as per the necessity of the activity level or production of units.
• Adjustable as per the necessity of the business.
• Semi-variable, with one part fixed and another part changed as per the activity level.
• More complicated than a fixed budget.
• Takes more time to prepare compared to a fixed budget.
• Suitable for all kinds of organizations, from micro to large.
• Estimated based on realistic situations.

In summary, a fixed budget is static and remains the same regardless of changes in business activity, while a flexible budget adjusts based on changes in activity levels or production units. Fixed budgets are simpler and easier to prepare, making them suitable for micro-enterprises, whereas flexible budgets are more complex and time-consuming to prepare but are suitable for organizations of all sizes.

Comparative Table: Flexible Budget vs Fixed Budget

Here is a table comparing the differences between a flexible budget and a fixed budget:

A fixed budget is a financial plan that remains constant, irrespective of the levels of activity, and is best suited for organizations with low variability in demand and minimal external factors affecting their operations. On the other hand, a flexible budget changes as per the necessity of the activity level and is best suited for organizations with high variability in demand or those easily affected by external factors or market fluctuations.