Let's assume specifics of a fictitious courier company to illustrate the concept of an activity-based flexible budget.
One activity of a courier company is transportation of goods by truck. The variable costs for the activity are driver wage, fuel, truck wear and tear or depreciation, and insurance. The underlying factor that determines how much wages, fuel, wear and tear, and insurance are required is the distance covered. Thus, the cost driver for the trucking activity center of the courier company is the distance.
Another activity of the courier company is delivery of packages from the warehouse to the addresses. The variable costs incurred for the activity are delivery agent salary and commission, vehicle cost, and administrative costs such as telephone as well as fixed costs such as warehouse rent. The cost driver for this activity is the number of deliveries.
This kind of budget therefore derives from the courier company incorporating projections that vary with distance for the trucking operations and the number of deliveries for the delivery operations.
An example of an activity-based flexible budget for the above illustration would reflect the following figures:
Distance – Driver Wage – Gas – Other Costs
- 1,000 Miles-$1,000-$50-$275
- 1,500 Miles-$1,250-$75-$325
- 2,000 Miles-$1,500-$100-$360
Delivery Budget for Warehouse X
Number of deliveries-Rent-Wages-Transport-Administrative Costs