Developing a budget is very vital for any business; it helps the organization to keep track of its incomes and expenses. Having a budget in business is very important because, it will help in achieving the set objectives and plan ahead.
A flexible budget is appropriate in future planning. It makes comparison between the original budget and the actual results. A flexible budget assists management in gaining insights into why the actual results differ from the planned performance (Wainwright, 2012).
Differences between flexible budget and static budget
- Only one level of activity is used in static budget. While a flexible budget is developed using budgeted revenues or cost, it is not restricted from one level of activity.
- A static budget is planned at the beginning of the period based on the level of output. However, a flexible budget is planned at the end of the period based on actual output (Wainwright, 2012).
- In the case of any change, a static budget cannot be able to ascertain costs in the correct manner. A flexible budget is best in identifying the variances.
- In addition to that, a Static budget is prepared under fixed conditions; the assumption is that everything is expected to remain the same. While on the other side, flexible budget is prepared under different levels of activities thus giving room for any change (Wainwright, 2012).
- There is an assumption that, in static budget it has limited application, therefore, ineffective tool for controlling costs. While on the other side, flexible budget has a wide application on controlling costs.
- A static budget is prepared without classifying the costs. However, a flexible budget is prepared by classifying the costs according to they are nature (Wainwright, 2012).
- Static budgets are prepared at the beginning of the period while flexible budgets are prepared at the end of the period.
When static budget is preferred over flexible budget
- A static budget is prepared a year in advance; this will depend upon the owners’ best guess about the future. The budget is broken down into small reporting period; this is considered advantageous over the flexible budget.
- Static budget at times is preferred over flexible budget because of its ability to identify variances. It is, in fact, known as variance analysis; this helps the owner to identify by how much was over or under the original budget (Wainwright, 2012).
- Static budget also acts as an effective tool in evaluating performance when the work environment remains consistent.
Wainwright, S.(2012).Principles of Accounting Volume 2. San Diego, CA: Bridge point Education.