What is a 'Static Budget'

A static budget is a type of budget that incorporates anticipated values about inputs and outputs that are conceived before the period in question begins. When compared to the actual results that are received after the fact, the numbers from static budgets are often quite different from the actual results.

BREAKING DOWN 'Static Budget'

The static budget is intended to be fixed and unchanging for the duration of the period, regardless of fluctuations that may affect outcomes. For example, under a static budget a company would set an anticipated expense, say $30,000 for a marketing campaign, for the duration of the period. It is then up to managers to adhere to that budget regardless of how the cost of generating that campaign actually tracks during the period.

Limits of Static Budgets

This type of budgeting is constrained by the ability of an organization to accurately forecast what its needs are, how much it will spend to meet those needs, and what its operational revenue will be for the period. Static budgets may be more effective for organizations that have highly predictable sales and costs, and for shorter term periods. For instance, if a company sees the same costs in materials, utilities, labor, advertising, and production month after month to maintain its operations and there is no expectation of change, a static budget may be well-suited for its needs.

If such predictive planning is not possible, there will be a disparity between the static budget and actual results. In contrast, a flexible budget might base its marketing expenses on a percentage of overall sales for the period. That would mean the budget would fluctuate along with the company’s performance and real costs.

When the static budget is compared to other facets of the budgeting process (such as the flexible budget and the actual results), two types of variances can be derived:

1. Static Budget Variance: The difference between the actual results and the static budget

2. Sales Volume Variance: The difference between the flexible budget and the static budget

These variances are used to assess whether the differences were favorable (increased profits) or unfavorable (decreased profits). If an organization’s actual costs are below the static budget and revenue exceeds expectations, the resulting lift in profit is a favorable result. The opposite is also true; if revenue does not at least meet the targets set in the static budget, or if actual costs exceed the pre-established limits, profits are diminished.

RELATED TERMS
  1. Annual Budget

    An annual budget outlines projected items on income, balance ...
  2. Budget Committee

    A budget committee is a group of people that creates and maintains ...
  3. Activity-Based Budgeting (ABB)

    Activity-based budgeting (ABB) is a method of budgeting where ...
  4. Administrative Budget

    A administrative budget focuses on the costs of running an operation ...
  5. Promotional Budget

    A promotional budget is money set aside to promote a business' ...
  6. Zero-Based Budgeting - ZBB

    Zero-based budgeting (ZBB) is a method of budgeting in which ...
Related Articles
  1. Personal Finance

    Here's How to Create a Successful Budget

    Break your expenses into needs, wants, and savings goals for a budget plan you can stick to.
  2. Personal Finance

    5 Reasons Why You Can't Stick To Your Budget

    You want to stay on track with your finances, but these fatal budgeting flaws may be holding you back.
  3. Personal Finance

    5 Budgeting Steps for Young Families

    Here are five steps young families can take to create and stick to a budget.
  4. Personal Finance

    How to Create a Budget You Can Actually Stick With

    Following these five steps can help you create a budget that you can stick with.
  5. Personal Finance

    How to Create a Budget You Can Stick With

    Following a budget can be difficult. But it’s usually the difference between living a stressful retirement versus the retirement of your dreams.
  6. Personal Finance

    3 Alternative Budgeting Styles: Which One Suits You?

    Not everyone is cut out for online or heavily-involved budgeting. Here are some budgeting solutions.
RELATED FAQS
  1. Is there a difference between the cash budget and a credit budget?

    Learn more about how cash flow is detailed in cash budgets and how credit budgets work. Find out what these budgets reveal ... Read Answer >>
  2. What are the revenue recognition criteria in accrual accounting?

    Discover some of the advantages and disadvantages of zero-based budgeting. Zero-based budgeting starts with a new budget ... Read Answer >>
  3. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
  4. What is the best software for calculating the cash budget of an individual?

    Explore the options and features of several leading personal finance tools to find the best software for calculating your ... Read Answer >>
Trading Center