Fixed Budget vs Flexible Budget

## Fixed Budget vs Flexible Budget

### Fixed Budget (Static Budget)

• A predetermined financial plan based on a fixed level of activity
• Remains unchanged regardless of actual activity levels
• Also known as a Static Budget

Essential Conditions for a Fixed Budget:

• Business is not seasonal
• No significant impact of external factors
• Demand is certain and stable
• Supply orders are received and issued regularly
• Domestic market (or regular export orders)
• No special labour or material requirements
• Regular supply of inputs
• Price stability trend

Merits of Fixed Budget:

• Very simple to understand
• Less time-consuming to prepare

Demerits of Fixed Budget:

• Unsuitable for dynamic organisations
• Inadequate for long periods
• Cannot accommodate constantly changing business conditions
• May produce inaccurate estimates

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### Flexible Budget

• A budget that adjusts with changes in output or turnover
• Recognises fixed, variable, and semi-variable costs
• CIMA: A budget which changes based on activity levels, considering fixed, semi-variable, and variable costs
• Provides expected results at multiple activity levels

Three expense categories in a Flexible Budget:

1. Fixed Expenses

2. Variable Expenses

3. Semi-variable Expenses

When is a Flexible Budget suitable?

• Seasonal fluctuations in sales/production (e.g., soft drinks industry)
• Companies frequently introducing new products or design changes
• Make-to-order industries (e.g., ship building)
• Industries influenced by fashion changes
• General instability in sales levels

Merits of Flexible Budget:

• Easy calculation of costs and profits at different capacity levels
• Allows simple adjustments to changing conditions
• Aids in determining the optimal production level for a desired profit

Demerits of Flexible Budget:

• Requires proper accounting system and standard costing
• Expensive and labour-intensive to develop and maintain
• Primarily quantity-focused; may miss other critical performance factors

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### Comparison: Fixed vs Flexible Budget