Static Budget vs Flexible Budget: Why Do You Need Both?
A flexible budget adjusts expected results to actual activity so performance can be evaluated fairly.
Static budget
A static budget is based on the originally planned activity level.
Actual activity changes
Comparing actual variable costs at a different activity level directly with the static budget can be misleading.
Flexible budget
The flexible budget recalculates expected revenues and variable costs for the actual activity level.
Flexible-budget variance
Compare actual results with the flexible budget at actual activity to isolate performance differences.
Activity effect
Compare flexible budget with static budget to isolate the effect of operating at a different volume than planned.
The takeaway
Flexible budgets separate doing more activity from performing better or worse.
Related Summit guides
FAQ
Does a flexible budget change fixed costs automatically?
Generally not within the relevant range unless facts indicate otherwise.
Why not compare actual directly with static?
Different activity levels can distort the comparison.
Does flexible budgeting use actual activity?
Yes.