Distinguish between static and flexible budgets. Give an example of how flexible budgets can be used.
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Static budgets are based on a single estimate of volume, whereas flexible budgets show estimated costs and revenues at a variety of activity levels. Both types of budgets are based on the same per-unit standard amounts and the same fixed costs. Flexible budgets can be used for planning and performance evaluation. For example, managers may be able to evaluate the adequacy of the company's cash position by assuming different levels of activity. Similarly, the number of employees, the amounts of materials, and the necessary equipment and storage facilities can be evaluated at different potential activity levels to ensure the company is adequately prepared for whatever actual volume level occurs. After the period, flexible budgets can be prepared for the actual volume and used to evaluate cost control.
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