Static budget

Definition

A static budget is a financial plan that remains unchanged irrespective of variations in actual output or sales levels. It is typically established before the start of a period and does not adjust for actual activity levels encountered during that period.

5 Must Know Facts For Your Next Test

1. Static budgets are based on fixed assumptions and do not change with actual performance.
2. They are mainly used for planning and initial budget approval purposes.
3. Static budgets can lead to variances when actual results differ from the planned figures.
4. They are less adaptable to changing business conditions compared to flexible budgets.
5. Performance evaluation using static budgets might be misleading as they do not account for variable costs or changes in output levels.

Review Questions

• Why might a company use a static budget despite its limitations?
• What are the primary differences between a static budget and a flexible budget?
• How can variances in a static budget affect managerial decision-making?

Related terms

Flexible Budget:

A financial plan that adjusts based on changes in actual activity levels.

Variance Analysis:

The process of analyzing the differences between planned financial outcomes and actual financial outcomes.

Master Budget:

A comprehensive financial planning document that includes all lower-level budgets within an organization.