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Flexible Budget and Static Budget

1. What is a flexible budget and how does it differ from a static budget?

2. Name the three criteria that should be considered in choosing an activity base on which to construct a flexible budget.

Solution Preview

A budget is a plan for the future. Hence, budgets are planning tools, and they are usually prepared prior to the start of the period being budgeted. However, the comparison of the budget to actual results provides valuable information about performance. Therefore, budgets are both planning tools and performance evaluation tools.

Usually, the single most important input in the budget is some measure of anticipated output. For a factory, this measure of output is the number of units of each product produced. For a retailer, it might be the number of units of each product sold. For a hospital, it is the number of patient days (the number of patient admissions multiplied by the average length of stay).

The static budget is the budget that is based on this projected level of output, prior to the start of the period. In other words, the static budget is the "original" budget. The static budget variance is the difference between any ...

Solution Summary

This solution of 548 words defines a budget and distinguishes the differences between a flexible and static budget. It also names more than three steps that should be considered in choosing an activity for a flexible budget.

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