Fixed budget is static: it remains the same throughout the stages of organizational run time and does not depend on any temporary factors. This form of budget tends to deal with fixed costs which, similarly, are rigid, such as rent, and do not depend on the output of the units produced. A flexible budget, on the contrary, is tied to the production output of a business and depends on the number of units produced, changing accordingly (Mukhopadhyay, 2021). The easiest example would be raw materials since the amount needed depends on the production plan.
Capital budget illustrates the sources of funding and the fixed assets purchases being allocated by an organization towards capital acquisition. The operating budget, however, is established for the purposes of a firm’s daily operations (Woodruf, 2019). It is used to pay bills, purchase raw materials and other necessary general expenditures and facilitate the liquidity of an organization. The two budgets are frequently kept strictly separate as their purposes within a firm differ drastically. However, the fixed assets purchases have an impact on the operational budget since fixed assets’ changes tend to affect the operation management of the firm.
Conversion of volumes into expense requirements refers to adjusting the labor budget to the expense rates in the area of a business. It involves calculating a worker’s average hourly wage and comparing it to the cost of living, such as average rent and utility bills. It is often facilitated by the budgeting committee to ensure the firm is providing high and competitive wages without overselling itself on the labor market. The process of conversion also includes structuring the forms of payment, such as allocation of the wage baseline and bonus amounts and requirements.
References
Mukhopadhyay Dheeraj Vaidya, CFA, FRM Reviewed by, S. (2021). Difference Between Fixed and Flexible Budget. WallStreetMojo.
Woodruf, J. (2019). Differences and Similarities of Capital and Operational Budgeting. Small Business – Chron.com.