What Is A Static Budget
What is a static budget?
A static budget is a budget that does not change as volume changes. If a company's annual master budget is a static budget, the budget for sales commissions expense will be one amount such as $200,000 for the year. In other words, in a static budget the budgeted amount for sales commissions expense will remain at $200,000 even if the actual sales during the year are $3 million, $4 million or $5 million.
In contrast to a company's static master budget, the company's sales department might have a flexible budget. In the flexible budget, the sales commissions expense budget might be expressed as 5% of sales. In that instance, the department's budget for sales commissions expense will be $200,000 when actual sales are $4 million, but it will decrease to $150,000 when actual sales are $3 million, and the budget will increase to $300,000 when actual sales are $6 million, and so on.
What is a static budget?
A static budget is fixed for the entire period covered by the budget, with no changes based on actual activity. Thus, even if actual sales volume changes significantly from the expectations documented in the static budget, the amounts listed in the budget are not changed.
A static budget model is most useful when a company has highly predictable sales and expenses that are not expected to change much through the budgeting period (such as in a monopoly situation). In more fluid environments where operating results could change substantially, a static budget can be a hindrance, since actual results may be compared to a budget that is no longer relevant.
The static budget is used as the basis from which actual results are compared. The resulting variance is called a static budget variance. Static budgets are commonly used as the basis for evaluating sales performance. However, they are not effective for evaluating the performance of cost centers. For example, a cost center manager may be given a large static budget, and will make expenditures
A static budget is a budget that does not change as volume changes. If a company's annual master budget is a static budget, the budget for sales commissions expense will be one amount such as $200,000 for the year. In other words, in a static budget the budgeted amount for sales commissions expense will remain at $200,000 even if the actual sales during the year are $3 million, $4 million or $5 million.
In contrast to a company's static master budget, the company's sales department might have a flexible budget. In the flexible budget, the sales commissions expense budget might be expressed as 5% of sales. In that instance, the department's budget for sales commissions expense will be $200,000 when actual sales are $4 million, but it will decrease to $150,000 when actual sales are $3 million, and the budget will increase to $300,000 when actual sales are $6 million, and so on.
What is a static budget?
A static budget is fixed for the entire period covered by the budget, with no changes based on actual activity. Thus, even if actual sales volume changes significantly from the expectations documented in the static budget, the amounts listed in the budget are not changed.
A static budget model is most useful when a company has highly predictable sales and expenses that are not expected to change much through the budgeting period (such as in a monopoly situation). In more fluid environments where operating results could change substantially, a static budget can be a hindrance, since actual results may be compared to a budget that is no longer relevant.
The static budget is used as the basis from which actual results are compared. The resulting variance is called a static budget variance. Static budgets are commonly used as the basis for evaluating sales performance. However, they are not effective for evaluating the performance of cost centers. For example, a cost center manager may be given a large static budget, and will make expenditures