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Static vs. Flexible Budgeting

In: Business and Management

Submitted By kareem1589
Words 519
Pages 3
Budgeting and carefully allotting a certain amount of funds towards necessary business expenses has always been one of the greatest challenges that managers and accountants face. Predicting the exact needs of the company in order to offer a product or service is always an estimation at best, as there a number of factors or variables that can easily throw the budget off track. In addition, knowing whether to implement flexible or static budgets to certain business expenditures for a certain period of time has always been a challenge, as each have clearly marked advantages and disadvantages. I will go over what each of these are for the two different types of budgets that corporations can use, depending on the strategy that they which to utilize.
Firstly, static budgeting is the type of budgeting where business owners will implement a set dollar amount towards expenses, no matter external variables may change (Brownell, P., & Merchant, K. A.,1990). The reason why this is done is because it allows corporations to track how much they are over-budgeting or under-budgeting over a certain period of time by using the variance analysis. With this method, they can see just how much is over-spent in a particular area, or where an insufficient amount of funds are being placed in a certain area. The trends that can be created will eventually help the organization track it’s particular spending habits. However, this can be one of its greatest downfalls. Newly built corporations don’t have a significant amount of prior data to build their variance analysis, and can make static budgeting much more difficult to use (Ittner, C., & Kogut, B., 1995). With this in mind, newly created businesses will use forecast models to best predict what the most likely outcomes of a particular time period.
Flexible Budgeting allows managers to restructure the budget in the middle of a reporting period, depending on upcoming expenses or variables that require a change to be done (Mak, Y. T., & Roush, M. L., 1994). This is more advantageous for new business owners as they are still working on understanding what expenses tend to be more fixed or variable. With this in mind, it is unfortunately much more difficult to adjust a budget within the middle of a reporting period. In addition, many new business owners are not aware of what expenses are directly related to changes in profits, as this may skew their calculations and hurt their business in the long run. However, with careful planning and understanding of when a flexible budget will be of better use to the corporation, this style of budgeting can be especially useful for a corporation that have highly unpredictable revenues and sales within a market period.
References:
Brownell, P., & Merchant, K. A. (1990). The budgetary and performance influences of product standardization and manufacturing process automation. Journal of Accounting Research, 388-397.
Ittner, C., & Kogut, B. (1995). How control systems can support organization flexibility.
Redesigning the firm, 155-182.
Mak, Y. T., & Roush, M. L. (1994). Flexible budgeting and variance analysis in an activity based costing environment. Accounting Horizons, 8(2), 93.…...

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