On the other hand, Company A would have a sales commission at 2%, 5%, or any other different percentage of the sales if it adheres to a flexible budget. Therefore, if the sales are $400,000, the commission, at 2%, will be $8,000 And if sales total $800,000, the commission, at 2%, will be $16,000.
Static vs. Flexible Budgets
How is a static budget different from other budgets?
A company can use a variety of budgets to monitor its financial performance and health. While a company’s financial budget may contain strategies for managing its assets, revenue, and expenses, its master budget may include a record of the company’s overall planning and financial health and productivity. These budgets may all be referred to as flexible budgets. A static budget may not be the same as flexible budgeting techniques a company might employ to keep track of its finances.
Financial budget versus static budget
The financial plan of a business provides a framework for managing and monitoring its costs, investments, and assets, as well as its sales, revenue, net income, gross profits, and liabilities. Any particular accounting period’s amounts tracked may change to reflect changes in sales, revenue, or even expenses. However, because a static budget is fixed, it might not take these kinds of modifications into account when allocating funds for costs, production, and employee compensation. Additionally, a static budget can remain constant for that time even if costs, payroll, investment interest rates, or revenue figures change.
Cash flow versus static budget
A cash flow budget can be used to estimate the amount of money that a company can anticipate bringing in and taking out of the business. The projected timeline of earning and spending can be used in conjunction with the cash flow budget to forecast how that money will flow through the business. Accounts payable and receivable management is a common focus of cash flow analysis. In contrast, even if a company can predict its cash flow for a specific time period, the static budget may not be impacted by changes in cash flow, regardless of whether the company’s cash flow projections are higher or lower than anticipated.
Operational versus static budget
The operational budget, also known as the overhead budget, takes into account anticipated costs and costs incurred by a business during operations. An operational budget can be similar to a static budget in that it projects anticipated costs and expenses, but the operational budget can vary depending on a company’s revenue and operational costs. The static budget reflects the same value that was decided upon at the beginning of the budgetary period, whereas the operational budget may be revised to reflect changes in the value of expenses.
Master or main budget versus static budget
The master, or primary, budget can be used to monitor the overall financial performance and health of a business. The organization’s allocated funds for investments, payroll, expenses, and other financial aspects can be tracked in the master budget. Also included in a company’s master budget could be a record of its static budgets over the course of the financial years that the company has been in operation.
The static budget’s main distinction is that it doesn’t change as cash flow, expenses, and other financial aspects of a company’s budget do. When used in conjunction with other budgeting techniques, a static budget can also be an effective budgeting tool.
What is a static budget?
An example of a static budget is one that projects a set amount for sales, revenue, and expenses. Regardless of changes in revenue volume, static budgets can remain unchanged, or fixed, in a company’s financial records. Companies can allocate funds to resources that they anticipate remaining constant for the duration of the specified period by using a static budget. For example, since rent and utility payments are typically the same from month to month, a business may set a static budget for these costs.
Additionally, a static budget can help a business keep track of and review both its expenses and sales. This can assist the business in assessing its general performance and financial health. A business can make sure it stays within its budget and monitor its performance in relation to long-term goals and objectives by comparing its current static budget to earlier periods.
The static budget variance
The difference between a company’s results at the end of the term and its static budget at the beginning of the term is known as the static budget variance. An effective tool for a business to compare with actual results or operational budgets at the end of a given period is the variance between budgets.
An organization might, for instance, use its static budget to contrast the revenue targets set at the start of the budgetary period with the actual revenue realized at the conclusion of the period. The outcomes, or “budget variance,” can provide financial managers with knowledge of the company’s overall revenue performance. In order to aid a business in better developing its entire budget plan, the static budget variance may also be used to compare the static budget to any other types of budget methods.
Examples of static budget
In the examples that follow, we’ll examine how various industries might use a static budget for a particular budgetary period.
Example 1
Let’s assume that Touch Soft Applications, LLC, a company that creates business apps, creates a static budget for its operating expenses. The company uses a quarterly budgetary period, and item costs like data storage, software subscriptions, and employee payroll are included in the static budget. The values that Touch Soft records for each item in the budget may include:
Touch Soft anticipates that its costs will remain at $65,000 for the quarter. The financial budget may be modified as the company progresses through the budgetary period to reflect the actual costs the company faces. The company won’t alter its fixed value, for example, if one of its contractors abandons a project to develop an app or the company needs an additional contractor.
Even if sales for Touch Soft’s apps created during the budgetary period total $125,000, its static budget of $65,000 will remain the same. This means that even if the business experiences a decline in sales, it will still have a fixed amount of $65,000 set aside for operating expenses. In the end, this could be a useful application of the static budget method, especially when results are compared across time.
Touch Soft might go a step further and use the static budget to contrast differences between the income actually received and a practical budget objective. For instance, if the static budget is $65,000 but the company was only able to sell $50,000 of the developed apps, the company may analyze the financial budgeting to determine where production cost increases or decreases can be made.
Example 2
In this example, J. C. Plumbers, Co. is a plumbing and repair business. The business keeps its supplies, machinery, and inventory in a sizable warehouse and office building where it conducts business. J. C. To project its costs for a 30-day budgetary period, Plumbers uses a static budget. The fixed values in the static budget are:
So the companys 30-day static budget is $26,000. J. C. Instead of an operational budget, Plumbers uses a static budget because the company anticipates consistently covering the cost of these expenses. Sales, construction projects, repairs, or other service sales are not taken into account when determining the value in the company’s static budget. Additionally, the static budget may be used by the company’s financial manager separately from other budgeting techniques.
FAQ
What is static budget and flexible budget?
Budgets that are prepared for only one level of production volume are known as static budgets. Also called a Master budget. Flexible Budget: A condensed budget that is simple to calculate for various production volume levels. Separates variable costs from fixed costs.
Which budget is also known as static budget?
What does static mean in accounting?
A static budget is one in which the sums remain the same even when the volume significantly changes. A company’s sales department may have a flexible budget as opposed to a static one.
