What is a Static Budget?

Explanation

  • Under a static budget, figures are all predetermined concerning inputs and outputs for the specified period. It can be described as the prediction of income and expenses for the time being, which is not affected by an increase or decrease in sales or production levels. Actual figures can accrue in line with the budget or vary widely depending on changes in anticipated situations.It remains fixed for the duration covered. To analyze different reasons, organizations prepare a flexible budget keeping in line with the current scenario. Finance professionals and management teams use it to fix target revenue and related expenses, costs, etc.All business organizations commonly use this type of budget. Like the public, private companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more, non-government organizations, educational institutions, and non-profit organizations due to limited available funds for the given period.

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Example of Static Budget

Marc Inc. is in the process of establishing a new manufacturing unit in the US. The company is planning to avail a loan from US Bank of $10,00,000. For this purpose, the company wishes to prepare a static budget with the following available data: –

  • Sales 1,00,000 units @ $14 each;Prime manufacturing cost @ $4 per unit;Overheads @ $4,00,000;Sales Variable expense @ 2 units;

The budget will be as follows: –

This budget will remain static despite the change in quantity produced/ sold.

Importance

Static Budget vs. Flexible Budget

  • A flexible budgetFlexible BudgetA flexible budget refers to an estimate which varies with the change in production activity or volume. Such a budget is more realistic and flares the managerial efficiency and effectiveness as it sets a benchmark for the actual corporate performance.read more is a form of costing analysis tool which changes with the change (increases or decreases) in sales and production level of business. Flexible budgets are fundamental tools to measure business performance on a static budget.The flexible budget helps ensure whether fund flows/ income expenses are in line with static budget anticipations, thereby enabling the business owner to monitor business efficiency. As flexible budgets are business performance analysis tools, you can use them either during the planned period or at the end of the business cycle.With the help of flexible budgets, the business management can adjust the next year’s static budget accordingly to manage the operating/ administrative/ selling or any other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more. You can use a flexible budget to meet any unforeseen situation like the requirement of more supplies in case of increased production due to an increase in demand. Or in case the company needs more employees for overtime in times of increased production and planning for product pricing, product costing, etc.

Advantages

  • It provides the blueprint of organization activities, which will be performed over time. Knowing in advance what the organization needs to do will always be beneficial for it to perform various activities efficiently.It does not need continuous updates throughout the year with any increase or decrease in sales or production level, so they are straightforward to implement and follow.Moreover, It provides a more in-depth knowledge of its profits and costs. An organization can change its policies and strategies for the future. This budget allows the company to track underestimating/ overestimating its income and expenses.Static budgets don’t allow any change if figures by any change in company production, so these companies can lower costs by making smarter decisions.

Disadvantages

  • The most significant disadvantage is flexibility. Suppose an organization plans a budget on a certain level of sales and conditions, and the level of sales increases/ decreases due to any reason. In that case, the static budget cannot allocate additional sales and costs incurredIncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more in the existing budget.The company can’t increase or decrease funds in areas where it finds under-performance to make better utilization. It will harm companies’ profits. It works on data from the previous cycle, but it is challenging for new business organizations to work on such budgets and apply.This budget is useful in a business where sales and expenses are highly predictable. In contrast, when companies see changes in sales and production levels from time to time, they can’t use a static budget. This budget cannot act as a tool for cost and benefit analysis. It will always be used in concurrence with a flexible budget to analyze the area for improvements.

Conclusion

You can describe a static budget as the basic outline or blueprint of a series of activities that an organization will carry out along with its financial figures, usually prepared at the initiation of either a new business plan or a new accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more. It has its advantages and disadvantages, like it provides a roadmap for spending on each activity like allocating funds for administrative, selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more, etc.

Accordingly, an organization can keep track of its expenses and ensure whether it is going on as per plan. The static budget becomes dysfunctional in case of a change in anticipated situations like a significant change in actual production/ sales. Overall it is a very beneficial tool for every organization for product profitability and cost analysis.

This article has guided what Static Budget is and its definition. Here we discuss examples and the importance of a static budget and its advantages and disadvantages. You may learn more about financing from the following articles –

  • Budget ReportAdvertising BudgetBudget AnalystOverhead Budget