In: Accounting
Question 1
Distinguish between static and flexible budgets and explain the advantages of using a flexible budget for control, compared with using a static budget.
Difference:
BASIS | STATIC BUDGET | FLEXIBLE BUDGET |
Meaning | It is a budget which does not change from the actuals whatever be the level of activity. The revenue and costs budgeted remain fixed. | It is a budget that changes with a change in level of activity. |
Activity level | It is preferable only for the activity level for which it is prepared. | It can be modified according to the level of activity being performed. |
Rigidity | Since it is beneficial for a single level of activity, it does not accept changes. Hence, it is very rigid. | As the name suggests, it is flexible as it supports any level of activity. |
Decision making | It cannot be used for correct decision making as budgeted and actual scenario may vary significantly. | It can facilitate decision making as costs and revenues at different capacity levels can also be identified. |
Comparative analysis | If actual and budgeted levels are different, comparison is not possible. | Comparison is possible even if actual and budgeted levels are different. |
Advantages of flexible budget over static budget: