Fixed Budget
A fixed budget, also known as a static budget, is a financial plan that remains unchanged regardless of variations in the actual level of output or revenue.
Thank you for reading this post, don't forget to subscribe!• In other words, A budget prepared for a predetermined activity and condition is called a static budget.
- This type of budget is prepared for a single level of activity and does not adjust even if there are changes in business operations or production levels.
A static budget is prepared under the following situations:
- The level of production and sales does not change even in long run.
- There is no necessity to produce new products.
Importance of Fixed Budget:
- Provides a clear target for revenue, costs, and profit, facilitating straightforward planning.
- It allows the firm to plan its output and input.
- It allows the business firm to monitor the departments day to day work.
- It helps the business firm in managing its cash inflow, cash outflow, income and expenditure.
- It ensures monetary control.
Note: Due to dynamism of business environment, the level of production and sales also changes. Hence, a static budget does not facilitate these to adapt with these changes, which makes it necessary to prepare flexible budget.
Flexible Budget
A budget that is prepared under different level of activities is known as flexible budget.
- It is based on the assumption that there might be change in the production, sales and working conditions.
Importance of Flexible Budget:
- It helps in preparing a realistic budget.
- Provides a realistic view of expected costs and revenues at different levels, aiding in more informed decision-making.
- Helps in controlling costs by providing insights into cost behavior at different levels of activity.