Fixed budget

Fixed budget
See also

Fixed budget (alternative term for static budget) - is a budget which is to remain unchanged irrespective of the volume of turnover or production achieved[1]. It is the main budget prepared immediately before the beginning of the budget period. The term "fixed" means that[2]:

  • the budget is prepared on the basis of estimated sales and production volumes
  • if during the control period (month or quarter or 4 weeks) real production and sales volumes are achieved in line with the previously estimated amounts the fixed budget should be changed to adapt to the new objectives and levels of activity.

The most important purpose of a fixed budget is to use it at the planning stage when the enterprise defines the goals it wants to achieve in the future. It can also serve as a benchmark in assessing the company's performance[3].

Fixed and Flexible Budgeting[edit]

Features of a fixed budget[4]: A fixed budget is based on one selected level of activity. The fixed budget report compares a single level of activity reflected in the budget to data from actual operations. It is a fume on the assumption that the company will achieve a certain production and will operate at a certain level of activity. Actual production is very often different from budget production, therefore, in practice, fixing errors with help of this budget is very rare. A fixed budget can be useful when it's result are close enough to the actual production. It should also be remembered that setting a fixed budget should be based on events that may occur in the future, rather than those that have occurred in the past. The best approach is to set goals in advance and then decide how they can be implemented. At the time, the fixed budget will serve as a tool for estimating costs that will help in achieving the set goals.

Features of a flexible budget[5]: A flexible budget is prepared for more than one type of activity. The basic principle that distinguishes a flexible budget is that each company is constantly changing, is dynamic and has to adapt its activities to the entire market. The flexible budget provides managers with access to information on multiple output levels when the expected production level differs from the actual level.Its main advantages and at the same time the function are: it covers the scope of activities, is easy to change and facilitates the assessment and measurement of performance.

Footnotes[edit]

  1. Dutta M.,(2003),13.25
  2. Astranti, Stiff P., Best N.,(2012),p.369
  3. Astranti, Stiff P., Best N.,(2012),p.369
  4. Lal J.,(2017), 9.22
  5. Lal J.,(2017), 9.22

References[edit]

Author: Sabina Łach