Question

What has been your experiences with static budget ?

Answer 1

This is the budget of planned forecasted future figures which don’t change even if there is a volume change. Therefore, a static budget doesn’t have any connection with the level of production or operation and it remains fixed always.

Example: Suppose there is $8,000 sales commission for three sales revenues $100,000, $120,000, and $150,000 are budgeted. Since there is static budget, the sales commission would be $8,000 for each of these sales.

Experience: Application of this type of budget is very narrow, since there is limitation – sales commission depends on sales revenue; if there is an increase in sale there must be an increase in sales commission; suppose 8% sales commission would be charged on sales; then for $100,000 sales, sales commission would be ($100,000 × 8% =) $8,000; for $120,000 sales, sales commission would be ($120,000 × 8% =) $9,600; and for $150,000 sales, sales commission would be ($150,000 × 8% =) $12,000; commission is paid because of increasing sale (this is an encouragement of doing better); if it is static, the progress would also become static; therefore, a static budget faces serious problem.