Question

While I understand the difference between what and Flexible budget and a Static budget is, one being the planning budget and one corresponding with what actually happens in a business, but when is it most appropriate to use one over the other? Should every business have both types of the budget or are there circumstances when using only one is necessary?

Answer 1

A flexible budget is a budget which adjusts or changes for a change in level of activity whereas the static budget remains the same.

Normally the actuals are compared to the budgeted values but due to the changes beyond our control we need to go with the flexible budget.

The business environment changes rapidly and an organisation should adapt to these changes swiftly. This is where the use of flexible budget arises.

So when there are changes beyond our control it is most appropriate to use flexible budget over static budget.

It is recommended for every business to prepare both types of budget so as to have competence.

The circumstances when only flexible budget can be used are:

1. When there is change beyond our control.

2. During the times of inflation.

When there are no such circumstances it is recommended to go with the static budget.