Flexible budget
In one sentenceA budget recalculated at the actual level of activity, so variable costs change with volume while fixed costs stay the same.
Simply put
If you planned to produce 10,000 units and then produced 12,000, your costs will naturally rise. A flexible budget answers a fair question: how much should 12,000 units have cost?
You use it at the end of the period when analyzing variances, because it separates the effect of a change in volume from the effect of real waste or savings.
Worked example
A packaging factory planned to produce 10,000 units at a variable cost of 20 SAR per unit and fixed costs of 50,000 SAR. It actually produced 12,000 units and its actual cost was 300,000 SAR.
Variable cost at actual volume12,000 × 20 = 240,000 SAR
Fixed costs50,000 SAR
Flexible budget240,000 + 50,000 = 290,000 SAR
Actual cost300,000 SAR
Variance = 300,000 − 290,000 (unfavorable)10,000 SAR
Formula: (Variable cost per unit × actual volume) + fixed costs
Don't confuse it with
Static budgetA static budget stays at the planned volume however activity changes, so it shows large variances caused by volume, not performance.