Advanced Flexible BudgetĮxpenditures may only vary within certain ranges of revenue or other activities outside of those ranges, a different proportion of expenditures may apply. If so, one can integrate these other activity measures into the flexible budget model. For example, telephone expenses may vary with changes in headcount. Some expenditures vary with other activity measures than revenue. In the case of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales. There is typically a percentage built into the model that is multiplied by actual revenues to arrive at what expenses should be at a stated revenue level. Basic Flexible BudgetĪt its simplest, the flexible budget alters those expenses that vary directly with revenues. In short, a flexible budget gives a company a tool for comparing actual to budgeted performance at many levels of activity. Several variations on the concept are noted below. This means that the variances will likely be smaller than under a static budget, and will also be highly actionable.Ī flexible budget can be created that ranges in level of sophistication. Budget versus actual reports under a flexible budget tend to yield variances that are much more relevant than those generated under a static budget, since both the budgeted and actual expenses are based on the same activity measure. If either of these variables changes, the breakeven point will change.This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $1 million. Monthly breakeven = $10 million / 12 = $833,333Īs long as expenses stay within budget, the breakeven point will be reliable. Here’s how those numbers fit into the breakeven formula:Īnnual breakeven = $1 million / 1 – ($10.8 million / $12 million) = $10 million For example, let’s suppose Division A generates $12 million in revenue, has fixed costs of $1 million and variable costs of $10.8 million. The basic formula for calculating the breakeven point is:īreakeven = fixed expenses / 1 – (variable expenses / sales).īreakeven can be computed on various levels: It can be estimated for the company overall or by product line or division, as long as you have requisite sales and cost data broken down. Examples: shipping costs, materials, supplies, advertising and training. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Variable/semi-fixed expenses.Your sales volume determines the ebb and flow of these expenses. Examples: property taxes, salaries, insurance and depreciation. These are the expenses that remain relatively unchanged with changes in your business volume. To calculate your breakeven point, you need to understand a few terms:įixed expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs. It’s the point at which total sales are equal to total expenses. Here are the details.īreakeven can be explained in a few different ways. The breakeven point is fairly easy to calculate using information from your company’s income statement. Variable Costs: How to Compute Breakevenīreakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan.
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