Answer to Question #50868 in Management for Iyyappan. M

Question

If sales forecast is subject to error, then there is no purpose of budgeting. Do you agree? Substantiate your views and also discuss how a flexible budget can be used by management to control the costs.

Answer 1

Answer on Question #50868, Management, OtherEven if sales forecast is subject to error, there is a real purpose of budgeting.
A flexible budget calculates different expenditure levels for variable costs, depending upon changes in actual revenue. The result is a budget that varies, depending on the activity levels experienced. You input the actual revenues or other activity measures into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs.
In short, a flexible budget gives a company a tool for comparing actual to budgeted performance at many levels of activity.