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What are differences between static and flexible budgets?

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Quick Answer

A static budget refers to a budget set by a company that predicts a certain level of sales and output before a sales period begins, while a flexible budget evaluates actual sales at the end of a given period. Static budgets, also called original budgets, help companies and sales managers prepare financially for a set time period by allocating a certain amount of financial resources and personnel to achieve certain sales and output volumes. Like flexible budgets, they play a role in helping organizations plan for the future, using projected estimates of input and output.

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Full Answer

Flexible and static budgets serve as equally important tools for companies. Static budgets act as planning and forecasting mechanisms. Accountants and sales managers prepare budgets at the start of a set term, which might be a quarter, half-year or full fiscal year. These budgets provide a best guess for output during that period of time. The type of output measured varies depending on the classification of the organization.

Retailers and grocery chains, for instance, might predict a certain volume of clothing and food sales during a given time period. Hospitals might anticipate a certain number of patients through a period of days or months. At the end of the period established in a static budget, the flexible budget enters the picture. This budget acts as a performance evaluation and reflection tool. It compares actual output to anticipated output, showing the variation between real sales and forecast sales.

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