A flexible budget is a budget that adjusts to changes in the volume activity.

For example, a
manufacturer calculates the cost of supplies and electricity for the factory are around $5 per machine
hour (MH), and depreciation, supervision, and other fixed costs are around $30,000 per month.
Production equipment operates between 3,000 and 6,000 hours per month. According to this
information, the flexible budget for each month would be $30,000 + $5 per MH. In April, the production
equipment needs to operate for 6,000 hours; the flexible budget for April will be $60,000 ($30,000 fixed
+ $5 x 6,000 MH). In May, the flexible budget will be 5,500 hours; the flexible budget for May will be
$57,500 ($30,000 fixed + $5 x 5,500 MH). In June, the flexible budget is 3,000 machine hours; the
flexible budget for June will be $45,000 ($30,000 fixed + $5 x 3,000 MH). If, more machine hours are
required, the budget increases for additional supplies and electricity costs, or the budget decreases
when the need to operate the equipment is reduced.
Cost-Volume-Profit (CVP) analysis involves the effect of sales volume and product costs on operating
profit of a company. The total fixed costs, sales price per unit, and variable cost per unit are constant.
All units produced are sold, and all cost can be categorized as fixed or variable. The basic formula used
in CVP is px = vx + FC + Profit (p is price per unit, v is variable cost per unit, x are total number of units
produced and sold, and FC is total fixed cost). The total number of units, price per unit, variable cost per
unit, and total fixed cost can be mixed and matched to calculate different types of analysis (breakeven
point, target profits, and contribution margin ratio).
The breakeven unit volume of a company is determined by dividing the total fixed cost of the business
by its contribution margin per unit (sales minus variable expenses). For example, a companys fixed
costs are around $60,000 per month, and the average contribution margin of a product is $40, the unit
volume to attain a breakeven point is 1,500 units ($60,000 / $40 = 1,500). The target profit is added to
the total fixed cost of the business and divided by its contribution margin per unit. For example, a
company wants to achieve a target profit of $30,000 per month; the fixed costs of $60,000 is added and
divided by the average contribution of $40, the recommended unit sales is 2,250 ($30,000 + $60,000 /
$40 = 2,250). The contribution margin ratio (CM ratio) is determined by dividing the contribution
margin by total sales. For example, the contribution margin of $120,000 divided by sales of $180,000 is
a 67% CM ratio. The breakeven point in dollars is calculated by dividing the fixed expenses of $60,000
by the contribution margin ratio of 67%, the breakeven in dollars is $89,552 in sales. The contribution
margin ratio is an important financial tool; it helps a business calculate a potential profit. The
contribution margin will be affected by a change in total sales.