Question

Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling operations of a business. Our textbook, Managing Accounting Concepts, describes 2 main types of budgeting: static budgets and flexible budgets.

Respond to the following in a minimum of 175 words:

• Differentiate between the 2 types of budgets.
• Provide an example of the type of business or company that would benefit from using a flexible budget.
• Provide support for your business selection and include the advantage for using a flexible budget over a static budget.

Answer 1

Flexible budget is one where you are allowed to change the amount in respect of items during the year while static budget does not allow any changing and remains as it is.

Biggest advantage of flexible over static budget is that you can add new items and even change amount which is restricted in static budget.

A status budget cannot ascertain certain costs in respect of change in circumstances which can be done in flexible budget. Example being covid pandemic.

Static budget is prepared on tha basis that all assumptions remain unaltered. Flexible budget allows changes as per changing conditions.

Cost control is not possible under static budget but possible under flexible budget.

No classification of costs is done under status budget but costs are classified as variable and fixed under flexible budget.

An example can be construction company.

The company prepared budget and assumed turnover of say $ 100,000 with labour expenses of 10,000.

The sales can increase or decrease and correspondingly labour expenses will also get affected.

If sales go down to say 80,000 then labour expenses should also go down to 8,000.

But if labour's go on strike then labour expenses may increase. Such changes are allowed by flexible budget and not static budget. Hence it is biggest advantage of flexible budget over static budget.