Fixed budget
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
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.
Examples of Fixed budget
- Fixed Capital Budget: A fixed capital budget is a budget set by a business to cover the long-term investments they need to make in order to grow and expand. This could include investments in new equipment, buildings, and technology.
- Fixed Labor Budget: A fixed labor budget is a budget set by a business to cover the costs associated with hiring and paying employees. These costs may include salaries, benefits, and other incentives.
- Fixed Overhead Budget: A fixed overhead budget is a budget set by a business to cover the costs associated with running the business, such as rent, utilities, and other administrative costs.
Advantages of Fixed budget
A fixed budget, also known as a static budget, is an unchanging budget that is not affected by the volume of turnover or production achieved. There are several advantages to using a fixed budget, including:
- Clarity and predictability: A fixed budget can provide clarity and predictability in terms of financial planning. A company can easily plan its spending and allocate resources accordingly. This can help to streamline the budgeting process and ensure that resources are allocated in an efficient manner.
- Improved financial control: Fixed budgets can provide improved financial control and oversight, which can help to reduce the chances of overspending. As the budget does not change with the volume of turnover or production, a company can better predict what its expenditures will be and plan accordingly.
- Cost efficiency: Fixed budgets can help to ensure that a company is using its resources in the most cost-efficient manner. By allocating resources in advance and sticking to the budget, a company can reduce wastage and ensure that it is making the most of its money.
Limitations of Fixed budget
Fixed budgets come with several limitations. They include:
- The lack of flexibility as it does not take into account any changes in the market or economic environment. This can lead to significant losses if the budget is not adjusted accordingly.
- It may not be realistic and may not accurately reflect the actual costs of production or services.
- It can lead to under - or over-spending, which can cause financial difficulties.
- It can lead to a lack of motivation and incentives for employees as there is no reward for exceeding their budget.
- It can lead to a lack of communication and collaboration between departments, resulting in inefficient operations.
Fixed budget, also known as static budget, is a budget that remains unchanged regardless of the volume of turnover or production achieved. This type of budget is usually used to control the costs of an organization. Other approaches related to fixed budget are as follows:
- Zero-based budgeting: This approach requires organizations to justify all expenses and allocate resources according to the strategic goals of the organization.
- Activity-based budgeting: This approach requires organizations to set a budget based on activities that are necessary to achieve a certain level of performance.
- Rolling budget: This approach requires organizations to create a budget that is continually updated throughout the year.
In summary, fixed budget is a type of budget that remains unchanged regardless of the volume of turnover or production achieved. Other approaches related to fixed budget are zero-based budgeting, activity-based budgeting, and rolling budget.
Footnotes
| Fixed budget — recommended articles |
| Allocated cost — Budgetary control — Functional budget — Cost tracking — Incurred cost — Normal cost — Master budget — Activity-based management — Cost avoidance |
References
- Astranti, Stiff P., Best N., (2012),CIMA P2 Performance Management: Study Text,"BPP Learning Media"
- Dutta M., (2003),Cost Accounting: Principles And Practice, "Pearson"
- Lal J.,(2017), Advanced Management Accouting (Text, Problems & Cases), "S. Chand Publishing"
- Livingstone J.L., Grossman T., (2001),The Portable MBA in Finance and Accounting, "John Wiley & Sons"
- Shim J.K., Siegel J.G., (2005), Budgeting Basics and Beyond, "John Wiley & Sons",
Author: Sabina Łach
