Prepared byDiane TannerUniversity of North Florida

Flexible Vs. Static Budgets

Chapter 7

Static and Flexible Budgets

Not adjusted for actual level of production

Budget that can be adjusted to various

activity levels

Which is best for use in performance analysis?

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3 Static Budget• The initial budget prepared at the estimated

level of activity, before the period begins• Prepared for a single level of activity• Difficult to compare actual costs at a different

activity level to a static budget • Why? Total variable costs change at

different levels of activity, while amounts on a static budget are for one level of activity

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4 Flexible Budgets• A budget that is adjusted for changes in activity

such as sales volume• Can be applied to any cost center or profit center

budget• Costs are often divided into variable and fixed

components– Variable portion

• Determined by multiplying the budgeted variable cost per unit times the actual number of units produced and sold

– Fixed portion • Represents the budgeted fixed costs and

remains constant at every activity level

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5 Using Budgets for Performance Evaluation

When comparing actual activity to budgeted activity, both activity levels must be the same.

Static budget Prepared for a single level of activity The initial estimated budget level

Flexible budget Prepared for the level of activity actually

achieved at the end of the accounting period Eliminates the problem of comparing actual

costs at one activity level to budgeted costs for a different level

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The End