Define static budget and flexible budget. What is each type used for?
A static budget is a budget for a particular level of activity. The master budget is an example of a static budget. It is developed in advance and is based on a single level of activity, embodied in the sales budget. The master budget is useful in planning so that the firm can determine its sales, production needs, costs, and potential financial statements. The static budget is less useful for control because the level of activity set in the master budget rarely matches the actual level achieved.
A flexible budget can be based on various levels of activity, or it can be based on the actual level of activity. The first type of flexible budget is useful in planning and sensitivity analysis. In this case, managers can see what happens to costs as the activity level increases or decreases. The second type of flexible budget is useful for control and performance evaluation. The flexible budget is useful for performance evaluation because the level of activity chosen for the budget is equal to the actual level achieved. As a result, the cost comparisons between the flexible budget amounts and the actual amounts are more meaningful.
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