Fixed vs flexible budgets

In this lesson

1. 0:00 Introduction to budgeting models
2. 0:28 Fixed versus flexible budgets explained
3. 2:00 How fixed budgets work and limitations
4. 4:01 Flexible budgets design and benefits
5. 6:26 Fixed versus flexible budgets worked example

About this lesson

This video breaks down how fixed budgets work (set at the start of the year and left unchanged), their limitations when circumstances shift, and how flexible budgets adapt to actual activity levels for more meaningful performance evaluation. You'll see a practical worked example showing how the same actual results can look like overspending under a fixed budget but reveal true efficiency gains when you flex the budget to match real activity. Fixed budgets are straightforward to set up but become increasingly unreliable as actual activity diverges from original estimates. They work best in stable environments where activity levels are predictable, but they can demotivate managers and become irrelevant quickly if conditions change. The main problem is that variances get distorted by planning errors rather than reflecting genuine performance issues. Flexible budgets solve this by adjusting the budgeted costs to match the actual level of activity achieved. This requires you to understand your cost behaviours—which costs are fixed and which are variable—so you can recalculate the budget proportionally. The benefit is clearer variance analysis and fairer performance assessment, though the trade-off is more initial work to identify and separate your costs. The worked example demonstrates why this matters in practice: a production scenario that looks like a £2,000 adverse variance under a fixed budget actually shows a £50 saving when flexed, because output was 25% higher than planned. This is directly relevant to Performance Management and Strategic Business Leader case studies, where you'll need to evaluate actual performance against budget and explain variances meaningfully to management.

Duration: 9m