Introduction
A static budget is a type of budget that incorporates guesstimated values of inputs and outputs that are formulated before the period in question commences. A flexible budget modifies to alter actual revenue levels. We will draw up the dissimilarities between these two terms in this article.
Static Budget vs. Flexible Budget
A static budget is a type of budget that incorporates guesstimated values of inputs and outputs that are formulated before the period in question commences. Whereas, Flexible budget is a pliable statement of income and expenditure that is free to change based on the alterations in activity level. The static budget is made based on the presuming that there will be no changes in the conditions. While a flexible budget is planned to change according to necessities.
The static budget doesn’t have a degree of adaptability. Whereas, a flexible budget Can be changed at will. It is Dynamic. A static budget is simple to prepare as only one budget with fixed numbers is prepared. While a flexible budget is highly complex. Because a series of budgets at the unalike level of changes or activity levels have to be formed. A static budget takes less time for preparation. On the other hand, a flexible budget Takes more time for preparation.
In the case of a static budget, costs are not divided into types (variable, fixed, or semi-variable) as there exists no variability. Contrarily, in the case of a flexible budget, Costs are divided in accord with the nature of their variability. In the case of a static budget, the difference between budgeted and actual data is sophisticated if numbers vary. In the case of a flexible budget, the difference between budgeted and actual data is simpler and more pragmatic.
Difference Between Static Budget and Flexible Budget in Tabular Form
| Parameters of Comparison | Static Budget | Flexible Budget |
| Definition | It is a prearranged guesstimate of income and expenditure for a specific period. | It is a pliable statement of income and expenditure that is free to change based on the alterations in activity level. |
| Assumption | The budget is made based on the presuming that there will be no changes in the conditions. | It is planned to change according to necessities. |
| Degree of adaptability | None | Can be changed at will. It is Dynamic |
| Ease of preparation | Simple to prepare as only one budget with fixed numbers is prepared. | Highly complex as a series of budgets at the unalike level of changes or activity levels have to be formed. |
| Time of preparation | Takes less time for preparation | Takes more time for preparation |
| Classification of costs | Costs are not divided into types (variable, fixed, or semi-variable) as there exists no variability. | Costs are divided in accord with the nature of their variability. |
| Comparison | The difference between budgeted and actual data is sophisticated if numbers vary. | The difference between budgeted and actual data is simpler and more pragmatic. |
| Variance Check | It is trouble-free to examine the degree of difference between actual and presumed figures (variance) due to its static nature | It is very strenuous to examine variance between data as the budget itself changes in accord with the activity level. |
| Price Fixation | If data differs, price fixation becomes strenuous. | Price fixation is simpler as a comparison between data can be met. |
| Outcome | It is less effectual as change is the only constant. | It is more effective because of its adaptive nature. |
What Is a Static Budget?
A static budget is a type of budget that incorporates guesstimated values of inputs and outputs that are formulated before the period in question commences. A static budget–which is a foretell of revenue and expenses over a specified period–remains constant even with rises or diminishes in sales and production volumes. Although, when contrasted with the actual outcomes that are received after the fact, the numbers from unchanged budgets can be quite unlike the actual outcomes. Static budgets are utilized by accountants, finance professionals, and the management teams of firms looking to measure the financial performance of a company over time.
Understanding a Static Budget
The static budget is planned to be fixed and static for the length of the period, despite variations that may impact results. At the time of using a static budget, some managers use it as a target for expenses, costs, and revenue whereas, others use a static budget to foretell the firm's numbers.
For instance, under a static budget, a company would set an estimated expense, say $40,000 for a marketing campaign, for the length of the period. It is then dependent upon the managers to abide by that budget despite how the cost of producing that campaign tracks throughout the period.
Static budgets are frequently used by non-profit, educational, and government organizations as long as they have been allotted a specified amount of money to be allocated for a period.
Advantages of a Static Budget
A static budget aids in analyzing expenses, sales, and revenue, which assists organizations in acquiring optimal financial performance. By holding on to each department or division within budget, firms can remain on track with their persistent financial goals. A static budget carries out as a guide or map for the all-inclusive direction of the company.
Within an organization, static budgets are frequently utilized by accountants and chief financial officers (CFOs)–offering them financial control. The static budget serves as a tool to avert extravagant spending and match expenses–or outgoing payments–with incoming revenue from sales. Briefly, a static budget that is controlled competently, is a cash flow planning mechanism for companies. Appropriate cash flow management aids assure companies have the cash obtainable in the event a situation arises where cash is required, including a breakdown in equipment or additional employees required for overtime.
At the time of utilizing a static budget, a company or a firm can record where the money is being spent or how much revenue is coming in, and help carry on track with its financial plans.
Limitations of Static Budgets
Static budgeting is restricted by the capability of an organization to precisely foretell its required expenses, how much to allocate to those costs, and its operating revenue for the coming period.
Static budgets may be more effective for companies that have highly foreseeable sales and costs, and for shorter-term periods. For example, if an organization perceives the same costs in materials, utilities, labor, advertising, and production month after month to regulate its functionalities and there is no anticipation of change, a static budget may be compatible with its requirements.
If such foreseeable planning is not possible, there will be an incongruity between the static budget and actual outcomes. In comparison, a flexible budget might base its marketing expenses on a percentage of all-inclusive sales for the period. That would signify that the budget would vary along with the company’s performance and real costs.
When the static budget is contrasted to other sides of the budgeting process (such as the flexible budget and the actual outcomes), two types of budget variances can be emanated:
- Static Budget Variance: The dissimilarity between the actual outcomes and the static budget
- Sales Volume Variance: The dissimilarity between the flexible budget and the static budget
These variances are used to measure whether the dissimilarities were favorable (augmented profits) or unfavorable (reduced profits). If a company’s actual costs were lower than the static budget and revenue surpassed anticipations, the resulting lift in profit would be a favorable outcome. Contrarily, if revenue didn't at least meet up with the targets set in the static budget, or if actual costs surpassed the pre-established limitations, the outcome would embark on lower profits.
What is a Flexible Budget?
A flexible budget modifies to alter actual revenue levels. Actual revenues or other activity assessments are entered into the flexible budget once an accounting period has been terminated, and it produces a budget that is specified to the inputs. The budget is then differentiated with actual expenses for control objectives. A flexible budget can be generated that ranges in the level of sophistication. Various diversifications of the concept are elucidated below. Briefly, a flexible budget gives a company an appliance for contrasting actual to budgeted performance at many levels of activity.
Basic Flexible Budget
Straightforwardly, the flexible budget changes those expenses that differ directly from revenues. There is commonly a percentage built into the model that is multiplied by actual revenues to reach what expenses should be at an uttered revenue level. In all respects of the cost of goods sold, a cost per unit may be used, instead of a percentage of sales.
Intermediate Flexible Budget
Some expenditures differ from other activity assessments from revenue. For instance, telephone expenses may differ from alterations in headcount. Consequently, one can merge these other activity assessments into the flexible budget model.
Advanced Flexible Budget
Expenditures may only differ within definite ranges of revenue or other activities; outside of those ranges, and unalike proportion of expenditures may implement. A sophisticated flexible budget will alter the proportions of these expenditures if the assessments they are relied on surpass their target ranges.
Advantages of Flexible Budgeting
The flexible budget is an alluring concept. Some advantages are elucidated below.
Usage in Variable Cost Environment
The flexible budget is very advantageous in businesses where costs are nearly put in an order with the level of business activity, such as in a retail environment where overhead can be discriminated against and treated as a fixed cost, whereas, the cost of merchandise is precisely related to revenues.
Budgeting Efficiency
Flexible budgeting can be utilized to more easily update a budget for which revenue or other activity figures have not yet been accomplished. Under this process, managers give their accordance for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity assessments. Then the budgeting staff terminates the remainder of the budget, which recirculates through the formulas in the flexible budget and instinctively changes expenditure levels.
Performance Measurement
As long as the flexible budget modernizes itself according to its activity levels, it is a good tool for evaluating the performance of managers - the budget should be closely put in an order with expectations at any number of activity levels.
These significant points make the flexible budget an alluring model for the advanced budget user.
Main Difference Between Static Budget and Flexible Budget in Points
- A static budget is a type of budget that incorporates guesstimated values of inputs and outputs that are formulated before the period in question commences. Whereas, Flexible budget is a pliable statement of income and expenditure that is free to change based on the alterations in activity level.
- The static budget is made based on the presuming that there will be no changes in the conditions. While a flexible budget is planned to change according to necessities.
- Static budget doesn’t have the degree of adaptability. Whereas, a flexible budget Can be changed at will. It is Dynamic.
- Static budget is simple to prepare as only one budget with fixed numbers is prepared. While a flexible budget is highly complex. Because a series of budgets at the unalike level of changes or activity levels have to be formed.
- Static budget takes less time for preparation. On the other hand, a flexible budget Takes more time for preparation.
- In the case of a static budget, costs are not divided into types (variable, fixed, or semi-variable) as there exists no variability. Contrarily, in the case of a flexible budget, Costs are divided in accord with the nature of their variability.
- In the case of static budget, the difference between budgeted and actual data is sophisticated if numbers vary. In the case of a flexible budget, the difference between budgeted and actual data is simpler and more pragmatic.
- Static budget is trouble-free to examine the degree of difference between actual and presumed figures (variance) due to its static nature. Contrarily, a flexible budget is very strenuous to examine variance between data as the budget itself changes in accord with the activity level.
- In the case of a static budget, if data differs, price fixation becomes strenuous. Whereas, in the case of a flexible budget, price fixation is simpler as a comparison between data can be met.
- Static budget is less effectual as change is the only constant. On the other hand, a flexible budget is more effective because of its adaptive nature.
Conclusion
Well, we have discussed the main topic which is the “Difference between Static Budget and Flexible Budget” in detail. Hope you got a clear understanding of the dissimilarities between the terms Static Budget and Flexible Budget. In a conclusion, we can say that this content will be effective for you for a better understanding of the differences between a Static Budget and d Flexible Budget. For further information, tell us by commenting down below.
