A Static Budget Is a Budget for a Particular Level

question 137

Essay

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 before-the-fact the budget gives expected outcomes for a range of activity levels. A before-the-fact flexible budget allows managers to generate financial results for a number of potential scenarios. The after-the-fact the budget is based on the actual level of activity. An after-the-fact flexible budget is used to compute what costs should have been for the actual level of activity. As a result, the cost comparisons between the flexible budget amounts and the actual amounts are more meaningful.PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 11-1
NAT: BUSPROG: Communication
STA: AICPA: FN-Decision Modeling | IMA: Budget Preparation | ACBSP: APC-36-Budgeting and Responsibility KEY: Bloom's: Comprehension NOT: 10 min.You decide
-Describe flexible budgeting, including the two types of flexible budgets.

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Definitions:

Demand Curve

A chart depicting how the price of a product correlates with the amount of it that buyers are prepared and can afford to buy at different price points.

Consumers

Individuals or groups who use goods and services generated within the economy.

Tax

Mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Good

A tangible item or service that can be bought, sold, or traded.