Fixed budgets are very simple to understand and less time consuming, however, only flexible budgets are more realistic and practicable because it…
CA Intermediate · Cost and Management Accounting · MTP · September 2024
Fixed budgets are very simple to understand and less time consuming, however, only flexible budgets are more realistic and practicable because it gives due consideration to behaviour of revenue and cost at different levels of activity. But still there are certain demerits of both the budgets. NARRATE the same.
Suggested Answer and Working Notes:
Demerits of Fixed Budget It does not suite a dynamic organization and may give misleading results. A poor or good performance may remain un-noticed.It is not suitable for long period.It is also found unsuitable particularly when the business conditions are changing constantly.Accurate estimates are not possible. Demerits of Flexible Budget The formulation of flexible budget is possible only when there is proper accounting system maintained, perfect knowledge about the factors of production and various business circumstances is available.Flexible Budget also requires the system of standard costing in business.It is very expensive and labour oriented.
Topics: Standard Costing, Budgets and Budgetary Control
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