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Management Accounting · Forecasting, Budgeting and Budgetary Control

Flexible Budget Preparation for CMA Intermediate

Updated 10 October 2026 · Fact-checked

A flexible budget shows expected costs and profit at several activity levels. To prepare one, split every cost into fixed, variable and semi-variable parts, split semi-variable costs using the high-low method or given data, then compute each cost at each activity level. Variable cost changes with activity; fixed cost stays constant within the relevant range.

Understand Flexible Budget Preparation

A fixed budget is prepared for one level of activity and is not changed when actual activity differs. If you budget for 10,000 units and produce 12,000, comparing actual cost with the fixed budget tells you little. Costs will look overspent only because volume was higher.

A flexible budget is designed to change with the level of activity. It is prepared for a range, such as 60%, 80% and 100% capacity. It can also be recast at the actual activity level after the period ends. That gives a fair comparison of actual against what the cost should have been at that output.

The whole method rests on cost behaviour. Variable costs change in total with activity but stay constant per unit. Fixed costs stay constant in total within the relevant range but fall per unit as activity rises. Semi-variable costs have a fixed part and a variable part, such as a power bill with a minimum charge plus a rate per unit consumed.

So your job is to separate each cost into a fixed amount and a variable rate. Once that is done, the budget at any activity level is just: fixed cost plus variable rate × activity. Sales, profit and contribution follow from that.

Fixed costs can step up if activity moves beyond the relevant range, for example when you must rent a second warehouse. Exams usually state such steps in the question. Apply them only where the question tells you to.

Key rules to remember

Total cost at any activity
Total cost = Fixed cost + (Variable cost per unit × Units)
Use for any cost that has been split into fixed and variable parts.
Variable cost per unit (high-low method)
Variable rate = (Cost at high activity − Cost at low activity) ÷ (High activity − Low activity)
Use for semi-variable costs when two activity levels and their costs are given.
Fixed element (high-low method)
Fixed cost = Total cost at either level − (Variable rate × Activity at that level)
Check by using both levels; you should get the same fixed amount.
Variable cost at changed activity
Variable cost at new level = Variable cost at base level × (New activity ÷ Base activity)
Shortcut when a variable cost is given only at one capacity level.
Fixed cost at changed activity
Total fixed cost is unchanged within the relevant range
Fixed cost per unit changes, but total fixed cost does not.
Contribution and profit
Contribution = Sales − Variable cost; Profit = Contribution − Fixed cost
Use this layout to get profit at each activity level.

How to solve Flexible Budget Preparation questions

Follow this order for any flexible budget question. It keeps the layout clean and earns step marks.

  1. 1Read the question and note the base activity level, the new activity levels, and any statement on price changes or step-up in fixed cost.
  2. 2Classify each cost item as variable, fixed or semi-variable. If the question does not say, use the information given to decide.
  3. 3Split each semi-variable cost into fixed and variable parts, using the high-low method or data given in the question. Show this working separately.
  4. 4Convert activity levels into units or hours. For example, 80% of a capacity of 10,000 units is 8,000 units.
  5. 5Draw the statement with activity levels as columns and cost heads as rows. Group the rows into variable costs, semi-variable costs and fixed costs.
  6. 6Compute each row. Variable costs scale with activity, fixed costs stay constant, and semi-variable costs use fixed plus variable rate × units.
  7. 7Add up total cost, then show sales, contribution and profit at each level. Add cost per unit if asked.
  8. 8Add a one-line comment, for example on how profit changes as activity rises or on the effect of any step-up in fixed cost.

Quickest way: Rate-and-fixed shortcut

When to use it: Use when the question gives cost at one base level and many activity levels are asked, with time pressure.

  1. Compute the variable cost per unit for each variable item once, from the base data.
  2. Find the fixed and variable parts of each semi-variable cost in a small side table.
  3. Add all variable rates into one total rate, and all fixed amounts into one total fixed cost.
  4. For each level, calculate total cost = total fixed + total rate × units. Show the heads only if the question asks for a detailed statement.
  5. Check one column by recomputing it head by head, so that errors in your totals are caught.

Common mistakes in Flexible Budget Preparation

  • Treating semi-variable costs as fully variable or fully fixed.

    Students skip the split because it needs extra working.

    Fix: Always separate the fixed and variable parts first. Show the split in a working note.

  • Changing total fixed cost with activity.

    Students scale every item by the activity percentage.

    Fix: Keep total fixed cost constant in the relevant range. Only per-unit fixed cost changes.

  • Applying the percentage to the wrong base, such as using 80% of a cost that is already at 70% capacity.

    The base capacity in the question is not noted clearly.

    Fix: Write the base level above the working. Use new activity ÷ base activity as the scaling factor.

  • Mixing up units when using the high-low method.

    Students pick the highest and lowest cost instead of the highest and lowest activity.

    Fix: Choose the points with highest and lowest activity, then use their costs.

  • Ignoring a price change or a step-up in fixed cost that the question mentions.

    Students stop reading after the first set of data.

    Fix: Underline every special instruction. Adjust only the items it affects, such as selling price or rent.

  • Showing only total cost and no profit or contribution.

    Students forget what the question asks for.

    Fix: Read the requirement line. If profit is asked, show sales, variable cost, contribution, fixed cost and profit.

Worked examples

Example 1

A factory has a capacity of 10,000 units. At 50% capacity, the costs are: direct materials ₹5,00,000, direct labour ₹2,00,000, variable overheads ₹1,00,000, fixed overheads ₹3,00,000. Selling price is ₹200 per unit. Prepare a flexible budget at 50%, 70% and 90% capacity showing profit.

Show the solution
  1. Units: 50% = 5,000; 70% = 7,000; 90% = 9,000.
  2. Variable cost per unit: materials ₹5,00,000 ÷ 5,000 = ₹100; labour ₹2,00,000 ÷ 5,000 = ₹40; variable overheads ₹1,00,000 ÷ 5,000 = ₹20. Total variable cost = ₹160 per unit.
  3. Contribution per unit = ₹200 − ₹160 = ₹40.
  4. At 5,000 units: sales ₹10,00,000; variable cost ₹8,00,000; contribution ₹2,00,000; fixed cost ₹3,00,000; loss ₹(1,00,000).
  5. At 7,000 units: sales ₹14,00,000; variable cost ₹11,20,000; contribution ₹2,80,000; fixed cost ₹3,00,000; loss ₹(20,000).
  6. At 9,000 units: sales ₹18,00,000; variable cost ₹14,40,000; contribution ₹3,60,000; fixed cost ₹3,00,000; profit ₹60,000.

Answer: Loss of ₹1,00,000 at 50%, loss of ₹20,000 at 70% and profit of ₹60,000 at 90%. Profit rises with volume because each unit adds ₹40 of contribution against a fixed cost of ₹3,00,000.

Example 2

A company budgets for 8,000 units at 80% capacity. Variable cost is ₹60 per unit. Fixed cost is ₹2,40,000. Maintenance is a semi-variable cost: ₹70,000 at 6,000 units and ₹90,000 at 10,000 units. Selling price is ₹110 per unit. Prepare a flexible budget at 6,000, 8,000 and 10,000 units showing profit.

Show the solution
  1. Maintenance variable rate = (₹90,000 − ₹70,000) ÷ (10,000 − 6,000) = ₹20,000 ÷ 4,000 = ₹5 per unit.
  2. Maintenance fixed part = ₹70,000 − (₹5 × 6,000) = ₹70,000 − ₹30,000 = ₹40,000. Check at 10,000: ₹90,000 − ₹50,000 = ₹40,000.
  3. Total variable rate = ₹60 + ₹5 = ₹65 per unit. Total fixed cost = ₹2,40,000 + ₹40,000 = ₹2,80,000.
  4. At 6,000 units: sales ₹6,60,000; variable cost ₹3,90,000; contribution ₹2,70,000; fixed cost ₹2,80,000; loss ₹(10,000).
  5. At 8,000 units: sales ₹8,80,000; variable cost ₹5,20,000; contribution ₹3,60,000; fixed cost ₹2,80,000; profit ₹80,000.
  6. At 10,000 units: sales ₹11,00,000; variable cost ₹6,50,000; contribution ₹4,50,000; fixed cost ₹2,80,000; profit ₹1,70,000.
  7. Check: maintenance at 8,000 units = ₹40,000 + ₹40,000 = ₹80,000, which lies between ₹70,000 and ₹90,000 as expected.

Answer: Loss of ₹10,000 at 6,000 units, profit of ₹80,000 at 8,000 units and profit of ₹1,70,000 at 10,000 units. Break-even lies between 6,000 and 8,000 units.

Exam tips

  • Show the semi-variable split as a separate working note. Even if the final figure is wrong, you can still earn step marks.
  • Draw the statement with activity levels as columns and group costs under variable, semi-variable and fixed. Examiners like clear layouts.
  • Read for price changes, step-up in fixed costs and special instructions before you begin. These are common traps.
  • In MCQs, check whether the question asks for total cost or cost per unit. Fixed cost per unit falls as volume rises, and this is a frequent MCQ trap.
  • If asked to comment, link profit change to contribution and fixed cost. One sentence is usually enough.

Practice questions from Forecasting, Budgeting and Budgetary Control

Flexible Budget Preparation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Flexible Budget Preparation: frequently asked questions

What is the difference between a fixed budget and a flexible budget?

A fixed budget is prepared for a single activity level and does not change. A flexible budget is prepared for several levels, or recast at actual activity. This makes performance comparison fairer.

How do I split a semi-variable cost?

If two activity levels and their costs are given, use the high-low method. Divide the change in cost by the change in activity to get the variable rate. Then subtract variable cost from total cost to get the fixed part.

Does fixed cost always stay the same in a flexible budget?

Total fixed cost stays the same within the relevant range. If activity goes beyond that range, fixed cost may step up. Change it only if the question states so.

Do I need to show contribution in a flexible budget?

Show it when the question asks for profit or when selling price is given. The layout sales, variable cost, contribution, fixed cost, profit is clear and easy to check.