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.