Presented by

Junaid Inam
 What is budgeting
Process of creating, planning and controlling to spend the
money.
Importance of Budget
i. Ensured of money when needs.
ii. Always keep you out of debt.
iii. Avoid you to spend money on un necessary items
and services.
Role of Budget in Planning and
Control.
 Flexible Budgeting
Flexible budget shows how cost vary with different
rate of output or sales volumes and sales revenue
based on these different outputs level.
Characteristics of flexible budgeting:
Easy to change according to variation of production
and sale volumes.
It help in controlling cost.
Flexible budget helps in measure the performance and
evolution.
Capacity and Volume of The
Flexible Budget.
The both terms are used in connection with the
construction of both the fixed and the flexible budget.
Any budget is forecast of the sale cost and expenses
must be brought under the harmony of the sale
volumes .
The terms used in the capacity levels
Theoretical capacity
To produce at full speed without interruption.)
Practical capacity
Highest capacity level at which the company can
operate with efficiency and conserving the un
avoidable losses of productive time.
 Analysis of the Cost Behavior
Flexible budget depend upon the careful study and the
relation ship of expense to volume of the activity
classifying expense as fixed variable and the semi
variable.
Fixed expenses
Remain same as the total activity increase or decrease.
Include conventional items such as the
Depreciation and the property insurance.
Variable expenses
Expected to increase proportionately with in an
increase in the activity and decrease proportionally
with decrease in the activity. It include the cost of the
supplies.
Semi variable expense
Both fix and variable characteristics.
Examples of the salaries of supervision, accountant,
buyers.
Determining the Fixed & Variable Elements
of the Semi Variable Expense
The determination of the fixed and the variable
elements of the semi variable expenses as well as the
total and the variable costs is necessary in order to
analyze plan and control measure:
Departmental expenses allowed at the various level of
activity.
Operating the efficiency of the department.
Break even point and cost volume profit analysis.
Company profit structure
Proposed capital expenditure.
Contribution margin and direct costing.
Utilization of facilities.
Marketing profitability of territories, products and
costumers.
Statistical method used in determining the fixed and
variable costs
High and low point method
Statically scatter graph method.
Method of the least square.
 High & Low Points Method

It is a two step process

Estimate variable cost by dividing the change in cost by
change in activity.
Require the analysis of the calculation of the activity at
its highest and lowest points.
The formula for this method is: variable costs=(Y2-
Y1)/(X2-X1).
After calculating the total variable cost the fixed
cost can then be determined by subtracting the
variable elements from the total documented costs.
 Statistical Scatter Graph Method

A visual technique for separating the fixed and

variable elements of a semi-variable expense in order
to estimate and budget for future costs.
A scatter graph is made up of a horizontal x axis that
represents production activity, a vertical y axis that
represents cost, data that are plotted as points on the
graph and a regression line.
Business managers use the scatter graph method in
cost estimation to anticipate operating costs at
different activity levels.
 Method of the Least Square
It is also called simple regression analysis.
A mixed cost can be split into variable and mixed by a
statistical technique called simple linear regression
analysis.
In cost behavior analysis, the cost volume formula
"y = a + bx", is equivalent to regression line.
By solving the above equations for total fixed cost (a)
and variable cost per unit (b), we obtain:
Preparing a Flexible Budget
Considerable discussion has been devoted to the detail
necessary for making the flexible budget.
Any decrease or increase in business activity must be
reflected throughout the enterprise.
some activates or department changes will be greater
than others the flexible budget deals with this
problem.
Flexible Budget
Larry’s Flexible Budget
What should the total wages and salaries cost be in a
flexible budget for 600 lawns?
a. $18,000
b. $20,000.
c. $23,000.
d. $25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn  600 lawns)
= $5,000 + $18,000 = $23,000
Flexible Budget with Multiple Cost Drive
Flexible Budget Input verses Output