Discussion – Fixed and Static Budgets

Discussion – Fixed and Static Budgets

A static budget refers to revenue and expenditure forecasts for a specific financial period that remained unchanged over the same period. On the other hand, a flexible a is one that is allowed to change based on a shift in the assumptions and underpinnings that were present for the budget during the management planning process. Therefore, the significant difference between the two budgets lies in the adaptability to various changes during the budgeting period. The management cannot change the static budget at will, while the flexible budget can be changed as much as necessary (Bowen et al., 2017). Another difference is that a static budget is manageable and takes less time because only one budget with fixed values is prepared. In contrast, a flexible budget is highly sophisticated due to the requirement for a series of budgets at different levels and different activity levels.

A company producing widgets can significantly benefit from using flexible budgets. Notably, this is so because the flexible budgets can allow the company take in changes in the market. For example, suppose two companies in the market produce widgets. In that case, a company may have to start the financial period with a budget estimating the production of 10 widgets at $100 each. If the company produces 100 units in a given month, a net profit of $5,000 (100*50) will be attained if each item brings a net profit of $50. However, if, before the month ends, the competitor moves out of the market, the demand for widgets will shoot upwards. As a result, changes to production requirements will be needed to meet this demand. Only a flexible budget can allow the company to meet the market demand.

The selection of a widget-producing company is embedded in the need to understand how a flexible budget is essential to a business. It shows that flexible changes can accommodate unplanned market events in the market and help keep up with the market pace (Holdo, 2020). Notably, a flexible budget is advantageous because it can help a company reflect more accurately on the business’s finances.

References

Bowen, T. R., Chen, Y., Eraslan, H., & Zápal, J. (2017). Efficiency of flexible budgetary institutions. Journal of Economic Theory, 167, 148-176.

Holdo, M. (2020). Contestation in participatory budgeting: Spaces, boundaries, and agency. American Behavioral Scientist, 64(9), 1348-1365.

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Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling the operations of a business. Our textbook, Managing Accounting Concepts, describes 2 main types of budgeting: static budgets and flexible budgets.

Respond to the following in a minimum of 175 words:

Differentiate between the 2 types of budgets.
Provide an example of the type of business or company that would benefit from using a flexible budget.
Provide support for your business selection and include the advantage of using a flexible budget over a static budget.