Following are the main differences between static and flexible budget: Show
1. Nature A static budget does not change with the actual volume of the output achieved. A flexible budget is designed to change appropriately with the level of activity attained. A static budget cannot ascertain costs correctly in case of any change in circumstances. Flexible budget can easily ascertain costs in different levels of activities. Start A Writing Career And Live The Adventure Static budget is prepared under the assumption that all
conditions will remain unaltered. Flexible budget is prepared at different levels of activities considering the possible changes in the operational aspect of a business. Static budget has a limited application and is ineffective as a tool for cost control. Flexible budget has a wide application as an
effective tool for cost control. Static budget is prepared without classifying the costs according to their variable nature. Flexible budget is prepared by classifying the costs according to their variable nature. You May Like One of the decisions that a budget manager has to make is whether to allow budgets to change over the course of a reporting period. A budget that never changes is called static, while a budget that changes based on actual activity is called flexible. Both approaches offer advantages and disadvantages for the new business owner. The Minuses of the Static Budget ApproachA static budget is planned ahead of time based upon your best educated guess about future actual activity. Static budgets are usually planned a year in advance, broken out into smaller reporting periods such as months and quarters. A big disadvantage for new businesses is the lack of actual data upon which to build a budget. If actual data differ significantly from the static budget, there's no way to change the budget or to determine if the costs to produce the revenue were properly controlled. Instead, you must produce a forecast. The forecast is a new document that predicts the remainder of the reporting period's activity and compares it to the static budget and the actuals. Why Static Budgets WorkThe best reason to use a static budget is the variance analysis. The variance analysis tells you how much your budget is over or under the original projections, via percentage and dollars. Even for new businesses, it may be easier to plan for future years when you know you have a comparison between what was expected and what actually occurred. In future years, you can adjust the budget up or down depending upon the variance percentages. Static budgets work best when you have a reasonable amount of certainty gauging what revenues and costs will be, barring extraordinary circumstances. The Minuses of the Flexible Budget ApproachFlexible budgeting is a more sophisticated method because you can make changes to the budget in the middle of the reporting period. However, you may not have the time, experience or inclination to adjust the budget frequently. Also, there may be unexpected effects from an unexpected change in volume, for which you won't know to plan. Flexible budgets require knowing in advance which costs are fixed or variable, and how expenses are affected by changes in revenue. Why Flexible Budgets WorkBecause the flexible budget changes based upon volume, it provides a greater level of control. New businesses need to keep a tight lid on costs; capping certain flexible expenses to a percentage of volume helps accomplish this. A new business could vary a great deal from what was originally planned, and flexible budgets offer a real-time view of a business's expenses and revenues. The savvy business owner may not have time to go through the trouble of issuing a forecast for the static budget. The flexible budget accomplishes the forecast in one step. Recommended textbook solutions
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Static Budget - the budget is prepared for only one level of production volume. Also called a Master budget. Flexible Budget - a summarized budget that can easily be computed for several different production volume levels. Separates variable costs from fixed costs.
What is a flexible budget and how does it differ from a static planning budget quizlet?How does it differ from a static budget? A flexible budget can be adjusted to reflect any level of activity—including the actual level of activity. A static planning budget is prepared for a single level of activity and is not subsequently adjusted.
What is a flexible budget?Flexible budgets are essentially budgets that can be adjusted depending upon revenue and cost changes throughout the fiscal year, accounting for expected unpredictability. Companies first account for the fixed costs they expect, or at least costs that they don't expect to change as the year progresses.
What is the difference between a flexible budget and a planning also called static budget what are each used for?The flexible budget allows the organization to respond to changes in demand over time, making it useful for planning incremental demands in labor, raw materials, and run rates. A static budget remains unchanged for the duration of the period and does not take changes in cyclical or seasonal demands into consideration.
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What is a flexible budget and how does it differ from a static planning budget?
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