Fixed and Flexible Budget

According to the flexibility factor, budgets are classified into:

Fixed Budget

This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned. Such budgets are preferred only where sales can be forecast with the greatest of accuracy which means, in turn, that the cost and expenses in relation to sales can be quite accurately ascertained.

Flexible Budget

The figures used in this form of cost and expenses budget are made adaptable to any given set of operating conditions within any month of the fiscal year. The figures range from the lowest to the highest probable percentages of operating performance. From this point of view, a flexible budget prepared for an expenses group can be for the entire fiscal year, or as long as there is no need of material changes in the standards. Thus, the flexible budget provides a distinct advantage over the static budget particularly where it is difficult to forecast sales, costs and expenses with any degree of accuracy.