Budgeting is a tool used by management for performing the functions of planning, coordinating, and controlling operations of a business. Our textbook Managing Accounting Concepts describes 2 main types of budgeting: static budgets and flexible budgets.
• Differentiate between the 2 types of budgets.
• Provide an example of the type of business or company that would benefit from using a flexible budget.
• Provide support for your business selection and include the advantage for using a flexible budget over a static budget.

ANSWER

Static budgets Vs.  Flexible budgets

Static budgets Vs.  Flexible budgets

Difference between the two types of budgets

A static budget is based on the level of planned output at the beginning of a budget period. A flexible budget, on the other hand, calculates budgeted revenues and budgeted costs, based on the actual output in the period of budgeting (Bigelow, 2019). A major difference between the two is that, a static budget is prepared for the planned output, while the flexible budget is prepared based on the output budget.

An example of the type of business or company that would benefit from using a flexible budget

Examples of firms that would benefit from using a flexible budget include restaurants and hotels. This is since the flexible budgets respond quickly to keeping such firms profitable over a given period.  Flexible budgets permit these companies to meet the continually changing needs over a given period of time.

The advantage of using a flexible budget over a static budget

Restaurants and hotels prefer using flexible budgets due to the varying advantages involved. Flexible budgets can be used to compare real-time results, where they offer a real-time view of a business’s expenses and revenues. They identify areas that are not in course with the projected budget; hence they can well be integrated with such businesses  (Bigelow, 2019).  They are necessary tools for management since they are used as a road map to plan a budget for the next financial year successfully.  They also help a firm make necessary changes in case activities surpass or fail to meet given expectations. Flexible budgets change based upon volume, hence providing a greater level of control, as compared to static budgets.

References

Bigelow, L. (2019). Static vs. Flexible Budgets for New Businesses. Retrieved from https://smallbusiness.chron.com/static-vs-flexible-budgets-new-businesses-20879.html