This video discusses some disadvantages of flexible budgeting.
While flexible budgeting can be very useful in analyzing whether revenues or expenses differed from what should have occurred, it is time-consuming and difficult to create an accurate flexible budget. This is because many costs are mixed costs– they contain both a variable and a fixed component. Calculating the predicted amount of a mixed cost involves the creation of a formula; if the formula isn’t correct, the cost prediction will be inaccurate. Thus, the quality of a flexible budget is a function of the formulas that were used to calculate the costs.
If a company’s cost structure mostly consists of fixed costs, then it might not be worth the effort to even create a flexible budget. The static planning budget will be very similar to the flexible budget when most costs are fixed; this is because fixed costs don’t change based on the activity level. Thus, there wouldn’t be much difference between the planning budget and the flexible budget since it wouldn’t matter what the activity level was in such a situation.