ACC 350 Week 9 Discussion

Professor and Class, The significant distinction between a static budget and a flexible budget is the static budget is prepared for a single level of activity. In contrast, a flexible budget is adjusted for different activity levels. When a flexible budget is used in performance evaluation, actual costs r compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget (1). Flexible budgets are adjusted based on changes in assumptions used to create the budget (2). A static budget remains the same, even if there are significant changes from the assumptions made during the planning process. Flexible budgets change based on volume, so they provide a higher level of control. If the business wants to maintain their costs, they can cap certain flexible expenses to a percentage of volume (3). Flexible budgets give a real-time view of the expenses and revenues of the company. Flexible budgets can be modified during the year, depending on the activity level of sales and production costs. They can be updated with current data, for example, if additional raw materials are required as the production is increasing. The most common errors in preparing performance reports are assuming that all costs are fixed or assuming that all costs are variable (1). This leads to inaccurate benchmarks and incorrect variances. This kind of error is made when static budgets are compared to actual costs without any adjustment for the actual activity level. Comparing actual costs to static budgeting costs will only work if the cost is fixed. If the cost is not fixed, then it will need to be adjusted for any changes in activity that occurs during the period (1). An example is an actual cost of supplies being $1,800 being directly compared to the planned cost of $1,500. This results in an unfavorable variance of $300.

1. Garrison, Ray. (2018). Managerial Accounting. McGraw-Hill. 2. https://www.nasdaq.com/articles/advantages-using-flexible-budget-vs-static-budget-

2016-02-27 3. Bigelow, Lisa. (2019). Static vs. Flexible Budgets for New

Businesses. https://smallbusiness.chron.com/static-vs-flexible-budgets-new-businesses- 20879.html