Static Budget

Most annual budgets start as static budgets. They set out planned revenue and costs based on expected sales volume and other assumptions, and they are used for planning, setting targets and allocating resources.

The limitation appears when actual activity differs from the plan. For example, if a factory budgeted for 10,000 units but produced 12,000, its materials and labour costs will naturally exceed a static budget. Comparing actual costs with the static budget would suggest overspending, even if the factory was perfectly efficient.

Static budgets work well for costs that do not change with volume, such as rent, insurance and salaried staff, and for organisations whose activity is fairly predictable, such as some public bodies.

For evaluating the performance of activities that vary with volume, managers usually use a flexible budget instead, which adjusts budgeted costs to the actual level of activity. Many businesses use both: a static budget for planning and a flexible budget for performance review.