To illustrate a fixed budget, let's assume that a company pays commission on its sales at a rate of 5%. If the company prepares a fixed budget and it is projecting sales of $1 million, its budget for sales commissions will be fixed at $50,000. If the actual sales end up being only $900,000 the budget for commissions will remain unchanged at the fixed amount of $50,000.
If instead the company used a flexible budget, its budget for sales commissions would be expressed as 5% of sales. This means that the budget for sales commissions will be $50,000 only when sales are $1 million. If sales are actually $900,000, the budget for sales commissions will flex and will be $45,000 (5% of $900,000).
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