Question

explain the difference between a statistic budget and a flexible budget. Explain what is meant by an activity variance and a spending variance

Answer 1

Difference between Static Budget and Flexible Budget

• Static budget is rigid and Flexible budget is flexible and adaptable
• Static budget assumes same working assumptions in actual business environment but flexible budget is helpful during uncertain times when actual working conditions change
• Static budget is defined at one particular level of activity where as flexible budget changes depending on actual activity level
• Static budget is not useful for decision making whereas flexible budget is useful for decision making like profitability statement, cvp analysis, break even analysis,etc
• Static budget is not useful in performance discussion where Flexible budget is useful for performance discussion
• Static budget does not help in variance analysis whereas flexible budget helps in variance analysis and taking right actions to control deviations.

Activity variance:

It is the difference between Static budget and Flexible budget. The difference is due to different volume of activity in static budget and flexible budget. Only Variable cost variances arise in Activity variance since fixed cost variance is nil

Spending variance:

It is the difference between Flexible budget and Actual results. . Flexible budget is a variation of static budget based on actual volume of activity. If actual spend is higher flexible budget allowed variance is unfavourable and vice versa.