Question

What is a static budget? What is a flexible budget? Which is more useful, and why? Cite any references used. Participate in follow-up discussion by reviewing your classmates' posts, adding additional information, asking questions, or responding to follow-up questions posed by your instructor.

Answer 1

A static budget is a budget that is prepared for a planned level of activity; that is it is prepared for a specific level of activity, say, 10000 units of a product, 10000 labor hours and so on. Hence, the budgeted revenues and expenses do not change from what is prepared.

A flexible budget on the other hand, is one that adjusts or flexes to the actual level of activity. For instance, if in the example given above of 10000 units of a product as the static level of activity, the actual level of activity achieved is 9000 units, then the flexible budget restates revenues and costs for 9000 units (but, at the same standards for 10000 units).

The flexible is more useful as it facilitates proper comparison of actual costs with allowed costs. The variances computed therefrom, would be appropriate for performance measurement.

If actual costs are compared with the costs stated in the static budget it will distort the picture and will either confer the concerned manager with an unfair advantage of unfair disadvantage.