static budgets and flexible budgets

 

Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling operations of a business. Our textbook, Managing Accounting Concepts, describes 2 main types of budgeting: static budgets and flexible budgets.

write a minimum of 175 words:

Differentiate between the 2 types of budgets.

Provide an example of the type of business or company that would benefit from using a flexible budget.

Provide support for your business selection and include the advantage for using a flexible budget over a static budget.

KEY TAKEAWAYS BEFORE ATTEMPTING THIS ASSIGNMENT

Budgets serve as a key tool used in many organizations to manage the allocation of resources and track the financial performance of a business. In this essay, we will examine the advantages and disadvantages of static and flexible budgets, and compare and contrast the two to help understand when each type of budget may be best used.
Static budgets are a traditional form of budgeting where revenues and expenses are planned in advance. This type of budgeting is beneficial in that it allows organizations to plan expenditures and revenue streams accordingly, as well as provide a framework for measuring performance (Hansen et al., 2003). However, static budgets also have their disadvantages. A key disadvantage is that they are often too rigid and can’t account for changes in the market or environment. Additionally, static budgets make it difficult to adjust for unforeseen circumstances or unplanned events, which can lead to a budget shortfall (Hansen et al., 2003). As such, many organizations are turning to more flexible budgeting models that provide greater flexibility and allow for more accurate budgeting. Despite their drawbacks, static budgets remain a popular budgeting option for many organizations due to their simplicity, and can be beneficial if properly managed.
Flexible budgets have been a topic of much discussion and debate in the accounting world due to their potential utility and drawbacks (Mak & Roush, 1994). Advantages of flexible budgets are that they are able to account for changes in activities or operations that may cause fluctuations in the budget. This allows budget holders to respond to changes in production or sales more quickly and accurately. Another advantage of flexible budgets is that they can help managers to better allocate resources by adjusting the budget to fit the expected production or sales. Furthermore, flexible budgets can also help managers to identify and correct inefficiencies in their operations. On the other hand, there are some drawbacks associated with flexible budgets. One of the primary criticisms is that flexible budgets can be difficult to create and maintain due to the complexity of the calculations involved. Additionally, there is a risk that managers may be too focused on short-term goals, as opposed to long-term objectives, when adjusting the budget. Furthermore, managers may also be tempted to overspend when they have the flexibility to do so, leading to budgetary overruns. In conclusion, flexible budgets can be a useful tool for businesses and organizations, but must be used with caution due to the potential drawbacks. Managers must carefully consider the advantages and disadvantages of implementing a flexible budget and make sure that it is the right decision for their organization.
Static budgets are budget plans that do not change over time, no matter the circumstances. As Pollak and Wales (1992) explain, this budget type is often used to establish a baseline of expected costs. However, static budgets can be inappropriate for businesses that experience fluctuations in their sales or costs. Flexible budgets are much better suited to these types of organizations, as they are designed to accommodate changes in cost or revenue throughout the year. Flexible budgets are typically based on expected changes in production levels, and they adjust the cost level of each budget item accordingly. This allows organizations to remain more financially prepared for unexpected changes in their operations. By contrast to static budgets, flexible budgets can provide organizations with a better understanding of how their costs and revenues vary over time. This can help businesses make better decisions and remain more financially secure.
A static budget remains fixed throughout the period and is used to plan, monitor and control expenditure. On the other hand, a flexible budget adjusts to actual level of activity and therefore the budgeted cost of activities will vary accordingly. Both budgets have advantages and disadvantages and should always be used according to the organization’s particular needs. Therefore, it is essential for organizations to consider the tradeoff between a static and a flexible budget when choosing the right tool to manage their finances.
Work Cited
YT Mak.”Flexible budgeting and variance analysis in an activity-based costing environment.”https://search.proquest.com/openview/6b920a458f76fd2195f69fd3e1a625a1/1?pq-origsite=gscholar&cbl=3330
SC Hansen.”Practice developments in budgeting: an overview and research perspective.”https://publications.aaahq.org/jmar/article-abstract/15/1/95/734
RA Pollak.”Demand system specification and estimation.”https://books.google.com/books?hl=en&lr=&id=38zQCwAAQBAJ&oi=fnd&pg=PR11&dq=3.+Comparing+and+Contrasting+Static+vs.+Flexible+Budgets&ots=IPV2nTQoB1&sig=I8vEvqNrgH39-6FZ_iDbMX5
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