Definition from Accounting.com: “A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity.”For more details about the traditional flexible budget, see traditional flexible budget.
Thus, a flexible OIS is the activity forecasted for the month adjusted, at the end of the month, for the actual activity that occurred in that month. The flexible OIS is basically a variance analysis.
Flexible OIS‘s Application: The main use for the flexible OIS is by the S&OP process users extended to include Marketing and Finance if they’re not already members of the process. The objective is to update the OIS model itself, going forward, as appropriate and then reoptimize, creating a new OIS. Possible updates/changes associate both with the OIS‘s model data and structure and, assuming they are significant, include:
- cost functions
- enterprise response functions
This flexibility keeps OIS always current and is only possible because it is the output of a model and not a process composed of many participants and, therefore, spread sheets and opinions.
Traditional Flexible budgeting issues addressed by OIS
- Formulation: difficult to formulate and administer; great deal of time to develop cost formulas: The OIS cost formulas, specifically cost functions and response functions, are developed only once when the baseline model is created. After that, they are updated only as the model’s data or structure change (see above)
- so flexible budget tends to include only a small number of variable cost formulas: OIS cost formulas are created for the ENTIRE income statement
- Closing delays; you cannot pre-load a flexible budget into the accounting sw for comparison to the financial statements. Instead you must wait until a financial reporting period has completed, then input revenue and other activity measures into the budget model, extract the results from the model, Only then can you issue financial statements that contain budget vs. actual information, with the variances between the two. This delays the issuance of financial statements. Irrelevant since the flexible OIS is for used internal purposes.
- Many costs not fully variable: Doesn’t matter. OIS‘s cost and response functions have fixed and variable components and span the necessary quantity range.
- they have fixed and variable components
- they vary across quantity range
- Costs vary by a variety of things including labor, purchase quantities, product batch sizing, time and experience: OIS’s cost and response functions can vary by quantity, volume or weight and can be tailored, as required, to mimic other variables