Definition: A fixed budget, also called a static budget, is financial plan based on the assumption of selling specific amounts of goods during a period. In other words, fixed budgets are based on a set volume of sales or revenues. This is an easy way for management to plan out expenses and operations when they assume that sales volume and total revenues will be a set amount during a period.
What Does Fixed Budget Mean?
There are, however, many shortfalls to using a fixed budget. For example, management’s estimates of revenues are rarely accurate. It’s extremely difficult to predict future demand and growth of an industry; so predicted values rarely match the actual numbers for a period.
Unfortunately, if the predicted numbers are not accurate enough, evaluations of performance, capacity, and profits can’t be used to compare the actual results with the budgeted expectations.
Example
Finding the favorable or unfavorable variances between the actual and budgeted performance is one way that management can gauge the performance of a segment. This is why flexible or variable budgets are usually preferred to static budgets. They are able to corresponding with the actual level of output and revenues better than a static budget.
A fixed budget does have a few advantages for some companies. Given their simplicity, static budgets are easy to prepare and allow management to focus on operations instead of being consumed with analysis. Fixed budgets are also useful for companies with reliable, annual trends.
For example, some industries rarely change and customer demand has been the same for the past 10 years. Companies in this type of industry can reliability use a set volume amount based on prior periods and still maintain accuracy.
