Key Takeaways
- A fixed budget is a financial plan that remains unchanged regardless of sales or production levels.
- A flexible budget is a dynamic financial plan that adjusts according to changes in activity levels or sales.
- A fixed budget is a plan that remains constant throughout the budget period. In contrast, a flexible budget is a dynamic financial plan that adjusts based on changes in activity levels or sales.
What is a Fixed Budget?
A fixed or static budget is a financial plan that remains unchanged regardless of actual sales or production levels. It is set at the beginning of a fiscal period and serves as a benchmark for evaluating performance. Fixed budgets are especially useful in industries with stable demand and predictable costs.
One of the key advantages of a fixed budget is its simplicity. It provides a clear, predetermined guideline for financial decision-making, making it easier for managers to allocate resources and access performance against a set standard. This can enhance cost control and help prevent over-speeding.
Fixed budget also have their limitations. They may become irrelevant if there is significant fluctuation in sales or expenses during the budget period.
What is a Flexible Budget?
A flexible budget is a dynamic financial plan that adjusts according to changes in activity levels or sales. It is designed to be more responsive to real-world conditions than a fixed budget. These budgets are precious in industries with variable demand and fluctuating costs.
The primary advantage of a flexible budget is its adaptability. It allows companies to account for sales, production, or other fluctuations, providing a more accurate reflection of expected costs and revenues. This makes it a valuable tool for performance evaluation and decision-making in industries with uncertain conditions.
Flexible budgets are created using formulas or percentages that relate expenses to changes in activity levels. As a result, they can provide insights into cost behaviour and help identify cost drivers within an organization.
Difference between Fixed and Flexible Budget
- A fixed budget is a plan that remains constant throughout the budget period. In contrast, a flexible budget is a dynamic financial plan that adjusts based on changes in activity levels or sales.
- Fixed budgets do not account for variations in activity or sales as they provide a static benchmark for evaluation. In contrast, flexible budgets are designed to account for variations in action, making them better suited for industries with fluctuating demand.
- Fixed budgets may limit adaptability in decision-making because they need to accommodate changes in circumstances. In contrast, flexible budgets facilitate better decision-making by providing insights into how costs behave in response to changes in activity.
- Fixed budgets are simpler to create and maintain because they do not require frequent adjustments. Due to ongoing updates, developing and preserving flexible budgets can be more complex and time-consuming.
- Fixed budgets are more suitable for industries with variable demand and predictable costs, such as manufacturing. In contrast, flexible budgets are precious in industries with varying directions and fluctuating prices, such as retail or healthcare.
Comparison Between Fixed and Flexible Budget
| Parameters | Fixed Budget | Flexible Budget |
|---|---|---|
| Nature of budget | Remains constant throughout the budget period | A dynamic financial plan that adjusts according to the changes in sales |
| Approach to Variability | It does not account for variations | Specifically designed to account for variations |
| Decision-Making | Limit adaptability in decision-making | Facilitate better decision-making |
| Complexity | Simpler to create and maintain | More complex and time-consuming |
| Industry Applicability | More suitable for industries with variable demand, like-manufacturing | Highly valuable for industries with variable demand and fluctuating costs like=retail or healthcare |
- https://search.proquest.com/openview/6b920a458f76fd2195f69fd3e1a625a1/1?pq-origsite=gscholar&cbl=3330
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-5957.2010.02228.x
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