Static Budget: Uses, Advantages & Limitations

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  • 0:02 What Is a Static Budget?
  • 1:32 Limitations of a Static Budget
  • 2:18 Advantages of Static Budgets
  • 2:55 Lesson Summary
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Lesson Transcript
Instructor: Noel Ransom

Noel has taught college Accounting and a host of other related topics and has a dual Master's Degree in Accounting/Finance. She is currently working on her Doctoral Degree.

This lesson examines the uses, advantages, and limitations of a static budget. We'll also discuss the implications of utilizing a static budget for controlling expenses and revenue.

What Is a Static Budget?

Steve is a sales leader in charge of the budget and resource allocation of a large sales department. Each year, Steve must determine the annual budget numbers for his department for the upcoming year and submit the budget to senior leadership. Since Steve runs a sales area, part of his budget will include the sales commission expense, which is the amount of commission that salespeople are paid, and the total sales for the year.

Based on sales for the previous year, Steve decides to set the sales commission expense to $300,000 and total sales to $3 million. Steve is pleased with his budget numbers and has confidence that the sales teams will meet next year's targets.

After six months pass, Steve decides to compare actual sales for the last six months to his annual budget. Based on Steve's projections, the total sales should be at $1.5 million. However, total sales are now at $2.5 million, and they are only halfway through the year! This is great news for the sales department and Steve. However, Steve can't make changes to his budget because he already set the figures for the year.

The type of budget Steve created is called a static budget, which is one that doesn't change throughout the year regardless of the situations that occur during the normal course of operating a business. Leaders create static budgets before the year begins, and they base budget numbers on previous trends as well as actual profit and expenses from previous years.

Limitations of a Static Budget

Although Steve's department has an increase in sales this year, the budget Steve prepared does not reflect the increase and can't change. One of the limitations of a static budget is that it's not flexible enough to make changes as sales and expenses change. And so, Steve can't manage the impacts of changes in profits, losses, revenues, or expenses.

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