What is the main difference between static and flexible budgets?
Understand the Problem
The question is asking for the key distinctions between static budgets, which do not change with variations in activity levels, and flexible budgets, which adjust based on changes in actual activity levels. We will explain each type of budget and highlight how they differ in purpose and application in financial planning and management.
Answer
Static budgets remain fixed; flexible budgets adjust with activity levels.
The main difference is that a static budget remains fixed regardless of changes in business activity levels, while a flexible budget fluctuates with changes in the level of business activity, such as sales and production volumes.
Answer for screen readers
The main difference is that a static budget remains fixed regardless of changes in business activity levels, while a flexible budget fluctuates with changes in the level of business activity, such as sales and production volumes.
More Information
Flexible budgets are useful for performance evaluation because they adapt to various levels of activity, providing a more accurate framework for comparison. Static budgets are simpler but less adaptive to changing conditions.
Tips
A common mistake is not updating the flexible budget to reflect actual activity levels, which can undermine its effectiveness.
Sources
- Static vs Flexible Budget: What and When to Use - LinkedIn - linkedin.com
- Static Budget Definition, Limitations, vs. a Flexible Budget - investopedia.com
- Flexible Budget Vs Static Budget: Pros and Cons | Planergy Software - planergy.com
