A budget can be defined as a management tools that put the managers in control of a financial health of the organisation. The objective of the budget is to measure of the financial structure of the organisation and budget is a tool that forces management to be accountable in a structured and objective way. How manager manage the budget is key to their value. Budget facilities the planning and resources allocation and help to estimate, itemized, analysis and examined the entire product and service that organisation offers to customer. Budgeting is a simple process of consolidating budget and adhere them as closely as possible. It is a process turns manager attitudes forward looking to the future and planning; managers are able to anticipate and react accordingly to the potential problem before it arises. Budgeting process allows manager to focus on the opportunities instead of figuratively. The aim of budgeting is to give management an idea how well the organisation is projecting the income goals and how well the organisation managing the working capital. The budgeting exercise should able to increase the profit, reduce inappropriate expenses and it also helps to expand the markets. To achieve the budgeting aim, the management needs to build a budgeting system. A budget system varies from organisation to organisation and it is not unitary concept. The fundamental concept of budget system involves estimating future performance of the organisation, comparing the actual performance to the budget and analysis the deviation of actual result against the budget. The factors that determining the type or style of an organisation depend on the type of organisation, the leadership style, the method of preparation and desired result.
Static Budget or Fixed Budget
Static Budget is also known as fixed budget. Accordingly to Chartered Institute of Management Accountants of England, “a fixed budget is a budget outline to remain unchanged irrespective of level of actual activities attained”. A static budget will reflect the expected result or revenues of a budgeting year of a responsibility center for one level of activities. Normally fixed budget will be prepared in advance before the financial year as the cost classified as fixed and it will not very in direct proportion of the level of activities. Fixed budget approaches are widely adapted by service industry and partly by some administrative functions of manufacturing companies such as purchasing, engineering and accounting. Fixed budget is used as an effective tool of cost. If, the level of activities attained are varies from the budgeted activities then fixed budget become ineffective. Comparatively, fixed budget is only suitable for fixed expenses. A fixed budget is appropriate under static condition.
Advantages and Disadvantages of Fixed Budget
Small business and service industries needs an overall budget to survive Fixed budget is most widely used by service and small industries as it help to track on control the spending. At the same time fixed budget can cause more problems rather than giving a solution. A fixed budget will capitalized the calculation fixed expenses and help to forecast the bills to be paid by the business. For the variable expenses, fixed budget provides maximize spending limits and it helps to control the finances.
The advantage of fixed budget is to help the business to prioritise the expenses. Fixed budget clearly distinction between the businesses needs and wants by forcing the business to remain consistent, it will also ensure that the bills are paid on time.
The disadvantage of fixed budget as it’s operates to one level of activity- the planned activity and it does not account for the business unpredictable activity. The actual always will be captured by a level of activity which is significantly difference from the planned activity. For example, to compare the actual production cost increased at production levels of 1000 units against a standard based on planned activity of 500 units could be misleading. Management will mislead thinking into that the production costs are out of control. An increase in production cost is avoidable as volume increases and it does not means that there is problem on increase cost occurred.