Question

• What is a flexible budget? When is it prepared?
• What is a static, or planning, budget? When is it prepared?

Answer 1

Solution. An organization operating in business market prepares budget in order to minimize costs and maximize profits. A flexible budget is one which varies aligning with varying volume of production/activity. It is based on costs of current or actual units of output and makes forecast of future generation of revenues from such input with respect to changes in level of activity(if any) for an organization during an accounting period. It is prepared by an organization in advance of planning period in order to lay plan accordingly based on future estimates of profit at different level of activities, in order to ignore unfavorable situations in future.

A static budget is one which remains unchanged at different levels of activities of an organization during an accounting period. It encompasses organization with determined high level/volume of sales in future to occur generating desired level of profit.

An organization in order to sustain in today's competitive economic market needs to study the different market factors and establish its own plans and procedures of operating in order to minimize costs and maximize profits. Planning helps an organization to move in desired direction of meeting its objectives along with social impact in society and turn unfavorable to favorable situations in future. It is prepared during onset of a business by collecting, interpreting and analyzing information.

A budget is a detailed representation of costs and revenues of organization's activities. It is prepared to generate financial information which facilitates in planning and different managerial decisions during an accounting period.