Difference between Flexible Budget Based on Two Cost Drivers and a Flexible Budget Based on a Single Cost Driver
According to Hansen, Mowen and Guan (2009), an activity based flexible budget is founded mainly on the budgeted costs for every activity and its interrelated cost driver. This means that activity based flexible budgets are founded on multiple costs drivers and a decision is made based on how effective they are in explaining the costs behaviors in flexible budgets. The costs tend to deviate in relation to the opposite cost driver in an activity founded flexible budget. Hansen, Mowen and Guan (2009) noticed that for every activity, costs are either variable or fixed, and dependent on various cost drivers.
One of the notable differences between a flexible budget based on two cost drivers and a flexible budget that is based on a single cost driver are the cost formulas. When there are two cost drivers, costs may tend to be a function of the initial cost driver while others may also tend to be the function of the second cost drivers. Other costs may also be a function of both cost drivers. According to Mowen, while conventional budgets are characteristically founded on a single cost driver such as machine hours and direct labor hours, flexible budgets that are based on activities are also based on two or more cost drivers (Mowen, 2012).
When studying differences between a flexible budget that is based on a single cost driver and a flexible budget that is based on two cost drivers, Hansen, Mowen and Guan note that in a functionally founded approach, budgeted costs for a specified level of activity can be attained through the assumption that a single unit based cost driver drives all the costs. This means that a given cost formula is developed for every cost item as a function of the total amount of direct labor hours or the units produced. Flexible budgets that are based on two cost drivers require the creation of more than one flexible budget formula, which includes cost estimation procedures that consist of least square methods and high-low methods.
Mowen also notes that one of the key differences between a flexible budget based on two cost drivers and a flexible budget based on a single cost driver can be derived from the advantages and disadvantages. While single cost driver based flexible budgets have been viewed as confusing and unreliable with regards to decision making, flexible budgets with two costs drivers tend to be an advantage for managers because it enables them to accurately forecast the desired costs for various levels of activities. The costs can also be compared to the actual costs with the objective of appraising the budgetary performance.
References
Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost Management: Accounting and Control: Accounting and Control. Stamford, CT: Cengage Learning.
Mowen, M. M. (2012). Cornerstones of Managerial Accounting. Stamford, Copnnecticut: Cengage Learning.
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