Static Budget
A financial plan developed for a single expected activity level that remains unchanged regardless of actual volume, serving as a fixed performance benchmark.
Static Budget
A financial plan developed for a single expected activity level that remains unchanged regardless of actual volume fluctuations, serving as a fixed performance benchmark throughout the budgeting period.
For example, a manufacturing company might prepare an annual static budget based on expected production of 10,000 units, including variable costs of $120,000 (at $12 per unit) and fixed costs of $300,000, totaling $420,000. If actual production reaches 11,000 units, performance would still be measured against the original $420,000 budget despite the volume difference.
Static budgets provide simplicity and stability in planning and evaluation, clearly communicating expected financial outcomes for a specific activity level. They work well for organizations with predictable volumes and primarily fixed costs, like government agencies or utilities. However, they create challenges for performance evaluation when actual activity differs significantly from budgeted levels, as variances will reflect both volume differences and genuine efficiency changes. This limitation has led many organizations to complement static budgets with flexible budgets that adjust for volume changes, variance analysis techniques that separate volume effects from efficiency, or rolling forecasts that update projections as conditions change.