Difference Between Fixed Budget and Flexible Budget with Comparison Chart

A flexible budget is very useful for purposes of budgetary control because it corresponds with changes in the level of activity. The advantage of fixed budget is to help the business to prioritise the expenses. Fixed budget clearly distinction between the businesses needs and wants by forcing the business to remain consistent, it will https://cryptolisting.org/blog/what-is-a-fixed-budget also ensure that the bills are paid on time. The performance report gives merely whether the actual costs are higher or lower than budgeted costs. The reason is that the actual output is differing from the budgeted output. Had the company prepared a flexible budget, the budget for sales commissions would be expressed as 5% of sales.

Programme or production goals in physical and financial terms are established in accordance with this new classification and after the period, the actual performance is compared. This budget is drawn for one level of activity and one set of conditions. It has been defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained. It is rigid budget and is drawn on the assumption that there will be no change in the budgeted level of activity.

Definition of fixed Budget

On the other hand, zero-base budgeting is not based on the incremental approach and previous year’s figures are not adopted as a base. Taking zero as a base, a budget is developed on the basis of likely activities for the future period. In such system of budgeting the money concept was given more prominence i.e. estimating or projecting rupee value for the various accounting heads or classification of revenue and cost. Such system of budgeting was more popularly used in government departments and many business enterprises. But is such system of budgeting control of performance in terms of physical units or the related costs cannot be achieved.

Although same initial efforts were made in this direction by the centre and some of the states, but it did not get wide acceptance. These days budgets are established in such a way so that item of expenditure is related to specific responsibility centre and is closely linked with the performance of that standard. Developing work programmes and performance expectations by assigned responsibility is the main issue involved in fixation of performance budgets and is necessary for the achievement and objects of the enterprise.

Assumptions and Estimates

But there are some activities which are not directly related to the firm’s output such as the legal staff and the personnel office. (v) Performance reporting indicating the result of analysis of the variance from the budget is done like that of variance reporting. If units are overlooked in the cost-to-cost comparison, accurate result is not available. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

Your health insurance, car insurance, life insurance, and homeowners or renters insurance are also examples of fixed costs. You would have to spend several hours researching alternate plans to change these monthly payment amounts. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year. The cash budget states cash inflows and outflows, expected borrowing, and expected investments, usually on a monthly basis. The budget committee usually develops the master budget for each year, guided by the budget director, who is usually the controller of the company. They usually plan the operating budgets first since the information from the operating budgets is needed for the financial budgets.

Static Budget Overview

(iii) To forecast the amount of expenditure under the various classification heads to meet the physical plan. (i) Establishment of well defined responsibility centres or action points where operations are performed and financial transactions in terms of money take place. (vi) Where the business units keep on introducing new products or make changes in the design of its products frequently. • It lacks when it comes to allocating additional resources, and keeping up with the increasing sales volume. It assumes that a business’s existing conditions will not change, which rarely happens in real life. By the end of the article, we should be able to distinguish one from the other as well as identify situations in which a particular type of budget is more suitable.

• By keeping each department or division within budget, companies can remain on track with their long-term financial goals.
• It can be freely adjusted or re-casted on the basis of output produced.
• Fixed budgets are useful for planning purposes as they provide a benchmark against which actual performance can be compared.
• When management uses financial information to make decisions, a static budget can help management measure performance by examining variances between budget and actuals.

• It gets tough to forecast the actual volume and budgeted volume if the output differs. Then, you may also have to prepare an alternative for every level of activity. First, you will have to categorize costs into fixed, variable, and mixed. For example, the production volume is highly dependent on customer demand. It also works for businesses that belong to industries that are highly influenced by external factors.

What Is a Master Budget?

A budget encourages you to save for major purchases, like a home or vehicle. And if you don’t have enough savings to cover the purchase, your budget can help you find other ways to make up the difference. @fBoyle– You have a point but that only works when one is fairly certain about what the costs and revenues are going to be.