What are the advantages and disadvantages of the static budget and the flexible budget?

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What are the advantages and disadvantages of the static budget and the flexible budget?

If you wonder what are the advantages and disadvantages of the static budget and the flexible budget? but you have not found satisfactory answers, you have come to the right place. In order to clarify your doubts, we have prepared for you an entire article related to the static budget and the flexible budget, so keep reading and enjoy it.

What is static budget and flexible budget? Her CARACTERISTICS

Let’s start by talking about the static budget, which can be defined as an estimate of future operations such as expenses, income and costs, prepared in such a way that it adapts to a standard production volume. That is, the estimation of these factors in the business budget is predetermined because it does not change according to the various variations in activity levels that are reached.

This type of budget is characterized by functioning as a criterion for cost control, in addition to being more convenient in companies where there is very little probability of fluctuations in the prevailing conditions.

On the other hand, the flexible budget refers to that budget made in order to anticipate any variation that may occur within the income obtained from sales in the company.

This budget is made after knowing the production levels and a sure certainty of the number of real sales, allowing different budgets to be drawn up, working according to the production levels that occur and the variations in costs.

people company graphics prepare budget

The most notable characteristics of the flexible budget are, firstly, the fact that it simplifies preparing a budget for a certain period in particular, in addition, it yields more exact results, since real data is included, such as the level of behavior of various factors in the face of changes. that may occur the level of activity.

Advantages and disadvantages of the static budget and the flexible budget

In view of the importance of preparing a budget in companies and businesses, it is worth analyzing the advantages and disadvantages of both the static budget and the flexible one, in order to apply the most convenient one.

Static budget: advantages and disadvantages

Among the various advantages that can be mentioned in relation to the static or fixed budget when implemented, we can mention the following:

  • In terms of the resources required, this budget requires less, both in the preparation process and in the monitoring process.
  • Compared to the flexible budget, the static or fixed budget is less complicated to prepare
  • While the flexible budget tries to cover possible risks, the static budget can be more realistic and practical.

Regarding the disadvantages, the static budget is not exempt from certain disadvantages, among which are the ones that we will mention below:

  • In the event of changes in production levels, the entire organization will have to be restructured
  • If the real results emanated by the company do not coincide with those expressed in the static budget, problems will occur when allocating resources
  • This type of budget does not cover the changing events that may happen around the organization, that is, the problems or variants that may arise in the organization’s environment

Flexible budget: advantages and disadvantages

The main advantages of implementing the flexible budget in companies are the ones that we will mention for you below in the following list:

  • If desired and needed, it can be easily changed in the face of any unforeseen event and does not require major reforms in the organization
  • It is a multiple and dynamic budget, which helps the administrator to benefit the organization, in relation to the importance of probabilities in companies when making decisions
  • It is specially structured and designed with the purpose that if the levels of activity change, it adapts to this and of greater coverage in the allocation of resources.

person fill out company budget form

Now to conclude, let’s mention the disadvantages of the flexible budget, among which these disadvantages can be mentioned and considered before implementing them:

  • It is more complicated to prepare, because various situations must be considered and various budgets structured
  • Requires more amount of resources compared to static budget
  • Although it covers several risks, it does not always offer a budget in accordance with reality
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