Question

After reviewing this week's resources and your research, in your own words define static budgets and flexible budgets. What are two (2) advantages of using the flexible budget?

Answer 1

Solutions:

A Static Budget, also known as a Fixed budget only takes into account a fixed level of activity. Income and expenses are budgeted for that specific level and it is rigid in nature. It is difficult to make a comparison between a static budget and the actual numbers. If the budgeted and the actual activity levels vary then, there will be difficulty in ascertaining the correct cost. It is mostly suitable for companies that are involved in same sort of transaction.

A flexible budget, on the other hand is dynamic. As the name goes, its flexible! In a flexible budget various levels of activity can be budgeted for. It allows to prepare a budget for the actual level of output, thereby enabling to compare the actual cost with budgeted cost for the same level of activity.

Two advantages of Flexible Budget

1. Flexibility – The budget can be prepared for any level of activity, thereby enabling cost comparison easier. It can be adjusted to reflect any level of activity.

2. Cost Control – A flexible budget provides the data needed for calculating variances – a fair comparison between a actual and budgeted cost for the actual level of activity , which is an integral part in having a check on the cost of goods produced, it throws light on good or lack of cost control.