Flexible Budgeting (Advanced Managerial Accounting) Essay Example

flexible budgeting, Grahame (2012) suggests that planning budgets are typically designed for a single planned volume of activity. Evaluating performance becomes challenging when the actual activity differs from the planned volume of operational activities. Flexible budgets can be prepared to accommodate any activity volume within a reasonable range, providing insight into what costs the company should have incurred if predictions were accurate and enabling apples-to-apples comparisons.Horngren (2003) states that managers can use flexible accounting to control operational costs and improve performance evaluation. It is essential for businesses to have flexible budgeting because accurately monitoring shifting expenses compared to the initial static budget is crucial for reporting actual earnings correctly. According to Juan (2007), flexible budgeting benefits businesses in four ways: adjusting for predictions, adapting to change, controlling and evaluating, and managing variance and inflation. Fixed budgets assume predetermined activity volumes such as production and sales quantities. However, certain uncontrollable factors may lead to estimates not aligning with the budget. This necessitates the adoption of a flexible budget that can be adjusted within a reasonable range based on activity volume. Kinney & Raiborn (2008) affirm that a flexible budget enables the firm to make necessary adjustments if activities do not go as predicted. The business environment is constantly changing, and it is important for businesses to adapt to these changes in order to succeed.A flexible budget is a useful method for adapting to changes, making operational adjustments, and taking advantage of opportunities in the external environment. Control and evaluation are important aspects of flexible budgeting as it allows businesses to track costs and identify deviations from planned performance. The flexible budget variance highlights the difference between

actual and budgeted costs. Flexible budgeting is instrumental in tracing variances between planned and actual estimates. Unlike a static budget which is based on assumptions and predictions, the flexible budget is derived from actual results, allowing for adjustments and comparisons with planned forecasts. By comparing actual profits and operational costs outlined in the flexible budget with those in the static budget, businesses can assess their performance accurately.Mina (2012) suggests that variance information plays a vital role in improving operational efficiency and identifying problem areas within a firm. The previous section provided an explanation of how flexible budgets function, and the following section explores their application in sustainability performance. Bacardi Limited is used as a case study to discuss the benefits of flexible budgeting in this context.

From the above discussion, it becomes clear that flexible budgeting is better equipped to handle financial changes that may arise during a firm's operations, as opposed to static budgets that maintain the same figures regardless of any changes. Bartley et al. (2012) argue that a flexible budget is the most suitable budget for determining and evaluating a firm's performance since it provides specific figures for different business-related groups. Flexible budget reports allow for the evaluation of various types of performances, including marketing, sales, employee performance, and sustainability.

Bartley et al. (2012) also emphasize the groundbreaking application of flexible budgets in measuring sustainability performance indicators. This is beneficial for businesses aiming to adopt environmentally friendly strategies. Just like other operational aspects, flexible budgeting can be used to assess a firm's performance in relation to sustainability key performance indicators (KPIs).Bartley et al (2012) propose incorporating an activity-based flexible budgeting approach for sustainability processes.

This approach addresses concerns that aggregate measures do not accurately capture improvement rates. For example, if Bacardi changes its production mix from Scotch Whiskey to rum, greenhouse gas emissions may increase even if emissions per unit decrease. This budgeting approach allows for the calculation of sustainability key performance indicators, which can be aggregated across product lines to measure company-wide efficiency improvements. These metrics are used internally for decision-making, control, and planning at Bacardi. The resulting efficiency measures can be compared with absolute sustainability performance measures to evaluate the company's sustainability performance. This demonstrates how Bacardi applied flexible budgeting to sustainability measures in a hypothetical scenario.Bacardi utilizes an activity-based flexible budget model that incorporates flexible budget variance analysis to evaluate its sustainability performance improvement. Flexible budget variance, as defined by Warren & Reeve (2011), represents the difference between the intended and actual expenses during a trading cycle. This variance can be positive, indicating that costs exceeded the budget, or negative, suggesting that actual costs were lower than planned. According to Juan (2007), flexible budget analysis is beneficial for measuring performance in various areas. When a firm's actual performance deviates from the planned performance, flexible budget variance analysis plays a critical role in controlling costs and evaluating performance. To conduct this analysis, a firm must have a static budget outlining costs for different business operations like sales, marketing, and advertising (Velmurugan, 2010). The variations between actual costs and projected values provide valuable insights into the firm's performance.Regarding performance measurement, Velmurugan (2010) emphasizes two key aspects that are often evaluated through flexible budget variance analysis: efficiency and effectiveness. Efficiency refers to the amount of input a firm uses

to achieve a given level of output, while effectiveness refers to how successfully the predetermined objective is achieved. Bacardi Limited uses an activity-based flexible accounting system as a performance evaluation tool, which is essentially a replica of flexible budget variance analysis. For example, the company first establishes the relationship between the amounts of a specific sustainability key performance indicator (KPI) and the activity level of a selected base year (Bartley et al., 2012). In Bacardi's case, they measure the carbon dioxide emissions levels of their Scotch whiskey distillery for a base year, such as 2010, during which they produced approximately 10,000 liters of alcohol and emitted around 20,000 units of carbon dioxide. Based on this data, the rate of carbon dioxide emissions for the year 2010 is calculated to be 2 units per 1000 liters of alcohol. At the end of the trading year in 2011, Bacardi then multiplies the actual activity level for that year (e.g., 12,600 liters of pure alcohol) by the rate from the base year, resulting in the flexible budget for 2011, which is 25,200 units of carbon dioxide (computed as 2 units x 12,600 liters). This calculation assumes that there have been no changes in efficiency.The firm compares the actual amount of carbon dioxide emissions during 2011 (20,300 units) with the amount in the flexible budget (25,200 units). The flexible budget variance is 4900 units. Bacardi Limited converts the variance to an index number using the formula: (100 X 20300 units)/ 25200 units, which equals 81. This analysis shows a 19 percent improvement in the efficiency of carbon dioxide emissions at the distillery. Bacardi Limited's method for calculating the variance

is similar to the process for preparing a flexible budget for performance evaluation. Both methods use per unit values and calculate variances based on actual input prices and quantities. Therefore, the efficiency variance in flexible budgeting is comparable to the index number used in Bacardi Limited's methodology.In conclusion, this paper has explored the concept of flexible budgeting and its application to performance measures of sustainability through activity-based flexible budgeting. It is important for management to evaluate the flexible budget at the end of the trading period to fine-tune static budget forecasts for the next cycle considering the dynamic nature of operational costs. Flexible budgeting provides several benefits for businesses, including adjustment for predictions, adaptation to change, control and evaluation, and variance and inflation. When incorporating flexible budgeting into sustainability measures, variance analysis becomes useful for firms. To conduct flexible budget variance analysis, a firm needs a static budget that outlines costs for various business operations like sales, marketing, and advertising. Comparing actual costs to projected values provides valuable insights into a firm's performance.