Flexible budgets provide different information than static budgets. Discuss some of these differences. Is a flexible budget always better? Are there times when you’d recommend using a static budget over a flexible budget?
Static budgets are developed for a single a single level of activity. A shortcoming of this approach is that it is insensitive to volume fluctuations. This presents special challenges for managing a business and for performance evaluation (Horngren 2012). As actual output varies from the anticipated level, significant deviations in revenues and expenses will naturally occur. These variances can produce quite misleading signals.
For example, if a company produces and sells more products than anticipated, you would also expect an increase in selected variable expenses. This will appear as a cost overrun when actual results are compared to the static budget.
Flexible budgets are recommended when the activity levels change as it takes in to account volume fluctuations
Horngren (2012) Cost Accounting: A Managerial Emphasis Pearson Education