You are the finance manager of a medium-sized manufacturing company. Recently, the management noticed that the actual expenses for the last quarter…

In this situation, It would be recommended to adopt a flexible budgeting system instead of relying solely on a fixed budget. A flexible budget is a budget which, by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover, or other variable factors, is designed to change appropriately with such fluctuations. According to CIMA, “a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained." Unlike static (fixed) budgets, the flexible budgets show the expected results of a responsibility center for different activity levels. It will offer following advantages: 1. With the help of flexible budget, the sales, costs and profit may be calculated easily by the business at various levels of production capacity. 2. In flexible budget, adjustment is very simple according to change in business conditions. 3. It also helps in determination of production level as it shows budgeted costs with classification at various levels of activity along with sales. Hence the management can easily select the level of production which shows the profit predetermined by the owners of the business. 4. It also shows the quantity of product to be produced to earn determined profit.