A static budget is one that doesn't fluctuate as activity levels change. As a result, even if actual sales volume significantly deviates from forecasts stated in the static budget, the budgeted amounts stay the same. This is the simplest and most widely used budgeting format.
Actual results are contrasted with the static budget as the benchmark. Static budget variance is the name given to the resulting deviation. The capacity of cost center managers to maintain control over their spending is frequently assessed using static budgets as the foundation.
The static budget is intended to be constant across time, independent of changes that may affect results.. Some managers use a static budget to forecast the company's metrics, while others use it as a target for expenses, costs, and income.
For instance, a corporation using a static budget would establish a projected expense for the duration of the time, such as $30,000 for a marketing campaign. Managers are therefore responsible for sticking to the budget, regardless of how the actual cost of running the campaign performs throughout the course of the period.
Non-profit, educational, and governmental organizations frequently employ static budgets since they have been given a certain sum of money to be allocated for a specific duration of time.
When a business has highly predictable sales and expenses that aren't anticipated to move much over the budgeting period, a static budget model is most helpful (such as in a monopoly situation). A static budget is quite helpful in these circumstances for tracking how well a corporation is performing in comparison to expectations.
A static budget might be problematic in more dynamic circumstances where operating outcomes might alter significantly because real results might be compared to an outdated budget. A static budget may also not always be useful for assessing the effectiveness of cost centers.
A cost center manager, for instance, can be given a sizable static budget, choose to spend less than that, and be rewarded for it, even if a much more significant overall fall in business sales should have required a considerably higher expense cut. The same issue emerges if sales are significantly greater than anticipated; cost center managers must spend more than what is specified in the static baseline budget and thus appear to have unfavorable variances, even though they are only meeting customer demand.
The variations can be extremely significant when utilizing a static budget as the foundation for a variance analysis, especially for the budget periods that are the furthest in the future because it is challenging to generate reliable predictions for durations longer than a few months. Instead, if a flexible budget is employed, it can be updated to account for variations in real sales volume, resulting in significantly lower deviations.
A static budget is created by ABC Corporation with expected revenues of $10 million and costs of goods sold of $4 million. Real sales of $8 million represent a $2 million negative static budget deviation. The favorable static budget variance is $800,000, while the actual cost of products sold is $3.2 million. The cost of products sold would have been set at 40% of sales if the company had instead employed a flexible budget; as a result, it would have decreased from $4 million to $3.2 million when real sales fell. This would have made the actual and planned cost of products sold equal, resulting in no difference in the cost of goods sold at all.
- A static budget includes anticipated values for inputs and outputs that are thought of before a period begins.
- A static budget predicts revenues and costs over a predetermined time period but stays the same despite variations in business activity.
- Government, educational, and non-profit institutions frequently employ static budgets.
- A flexible budget, as opposed to a static one, adapts to variations in sales and production levels.