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Flexible and Static Budgets

The three components involved in the creation of a budget are revenues, expenses, and the statistics (volume).
A. In what order are each component determined and why?
B. What is the differences between a static and flexible budget?
C. As a manager, which type of budget would you prefer to operate under? Why?

Solution Preview

The three components involved in the creation of a budget are Revenue, Expense, and the statistics (volume).

A. In what order are each component determined and why?

In the creation of a budget, the volume would be planned first. Then the selling price per unit would be applied to determine the Revenue, and then the expense would be determined to support discussion of Gross Margin. Gross Margin is determined by subtracting expense from Revenue. This is a suggested order because knowing the revenue is not possible without the volume, and knowing expense is not possible without knowing revenue.
So the order is: Volume, Revenue, and Expense

B. What is the difference between a static and flexible budget?

"A static budget is a budget that is completed prior to the budget ...

Solution Summary

This solution defines a flexible and a static budget. It identifies the differences of each budget and discusses the preferred use of the flex budget.

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