Types of Budget: Fixed budget and Flexible budget

Fixed Budget

A fixed budget is prepared based on a single, predetermined level of activity. It assumes that this specific level of activity will be achieved, and the budget remains unchanged even if the actual level of activity differs. It's also sometimes referred to as a static budget.

Key Characteristics of a Fixed Budget:

• Based on a Standard Level of Activity
• Static and Unchanging
• Simple to Prepare

Limitations of a Fixed Budget:

• Lack of Flexibility
• Limited Use for Control

2. Flexible Budget

A flexible budget, in contrast, is designed to adjust for changes in the level of activity. It recognizes that actual activity levels may vary from what was originally planned and provides different budget figures for different activity levels. It's also known as a variable budget.

Key Characteristics of a Flexible Budget:

• Adjusts for Activity Levels
• Uses Cost Behavior Analysis
• More Useful for Control

Benefits of a Flexible Budget:

• Improved Performance Evaluation
• Better Cost Control
• Enhanced Decision Making