## Flexible Budget

### Learning Outcomes

• Prepare a flexible budget for a manufacturing company

Let’s review GelSoft’s costs, both variable and fixed.

Variable costs, per the master budget, consist of direct materials, direct labor, and a small amount of variable manufacturing overhead (such as utilities and shipping supplies):

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Fixed costs included a long list of manufacturing overhead costs and selling, general, and administrative costs, summarized below:

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Using a contribution margin format, we could create a static budget:

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Variable costs are computed at $18.68 per unit times 172,405 units =$3,220,525 (rounded to the nearest whole dollar).

Notice that the operating income computed using the contribution margin format is different from the operating income computed in the master budgeting process because we used full absorption costing in the master budget and took into account beginning and ending inventories.

We could test our contribution margin statement format by adding a column for production because when we created contribution margin statements, we assumed that production was equal to sales:

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Here, our total variable and fixed manufacturing costs are equal to the total variable costs we calculated in our master budget when we calculated cost of goods sold (off by \$5 due to rounding):

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And so, the difference between our contribution margin statement and the master budget is the effect of sales volume versus production volume—and the effect of both beginning and ending inventory.

Let’s add one more column to our budget for a possible sales volume of 185,000 units:

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We now have a flexible budget that accommodates three different scenarios:

1. Sales of 158,605 units resulting in a loss for the company
2. Sales of 172,405 upon which the master budget was prepared
3. Sale of 185,000 which might represent a “best case” scenario

An actual flexible budget could be prepared using two or more scenarios (although more than three might not add to the usefulness) and could be presented in much more detail. In addition, the flexible budget will only be useful within a relevant range. For instance, increasing production enough to cover 185,000 in sales may change both fixed and variable costs.

Before we move on to compute variances, check your understanding of the flexible budget.