Budgeting is a crucial aspect of financial management for both individuals and businesses. It involves planning and allocating financial resources to various activities and projects. Two common types of budgets used in this process are fixed budgets and flexible budgets. Understanding the differences between these two approaches is essential for effective financial planning and decision-making.
What is fixed Budget?
A fixed budget, also known as a static budget, is a financial plan designed based on a set level of activity. It remains unchanged regardless of actual performance or changes in the business environment. Fixed budgets are typically prepared for a specific period, such as a fiscal year, and are based on predetermined estimates of revenues and expenses.
What is flexible budget?
Unlike a fixed budget, a flexible budget is adaptable to changes in activity levels. It adjusts itself based on actual performance or changes in the business environment. A flexible budget allows for modifications in revenues and expenses, providing a more realistic financial plan that reflects the dynamic nature of businesses.
The following are the main difference between fixed and flexible budget.
Difference between Fixed Budget and Flexible Budget
|Fixed budget is inflexible and does not change with the actual volume of output achieved.
|Flexible budget can be suitably recasted quickly according to level of activity attained.
|Fixed budget assumes that conditions would remain static.
|Flexible budget is design to change according to changed conditions.
|Costs are not classified according to their variability i.e. fixed, variable and semi variable.
|Coasts are classified according to the nature of their variability.
|Comparison of actual and budgeted performance cannot be done correctly if the volume of output differs.
|Comparisons are realistic as the changed plan figures are placed against actual ones.
|It is difficult o forecast accurately the results in it.
|Flexible budget clearly shows the impact of various expenses on the operational aspects of the business.
|Only one budget at a fixed level of activity is prepared due to an unrealistic expectation on the part of the management
|Series of budgets are prepared at different level of activities.
|Fixed budget has a limited application and is inefficient as a tool for cost control.
|Flexible budget has more application and can be used as a tool for cost control.
|If the budgeted and actual activity levels vary, the correct ascertainment os coasts and fixation of prices becomes difficult.
|Flexible budget helps in fixation of prices and submission of tenders due to correct ascertainment of coasts.