Question

Either where you work, or an organization you are familiar with, do you believe your organization uses a flexible or static budget? Why do you think so?

Answer 1

To the prestigious organisations that I have learned & observed , Companies use static budgets for a variety of reasons. Static budgets help companies plan for their future activities. Also , a static budget is the variance analysis which 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.

What I Feel with that , a flexible 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. Flexible budgets require knowing in advance which costs are fixed or variable, and how expenses are affected by changes in revenue.

Why Flexible Budgets Work

Because 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 businesses may not have time to go through the trouble of issuing a forecast for the static budget. The flexible budget accomplishes the forecast in its execution.