From the course: Accounting Foundations: Budgeting
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Weakness with static budgeting
From the course: Accounting Foundations: Budgeting
Weakness with static budgeting
- So far, the budgets discussed in this topic are static budgets. That is, they are geared to only one level of sales activity. However, as hard as companies try to predict sales volume, these numbers rarely turn out to be exactly as predicted. In fact, as there are unexpected changes in the economy and technology, or in the actions of competitors, actual sales can turn out to be very different from planned sales. This is a critical issue since sales budgets are the key input in building the rest of the operational budgets. Therefore, the budgets need to be recomputed based on the actual sales activity. This is the process of creating a flexible budget. A flexible budget is much more useful for control and performance evaluation because it's not confined to one level of activity. Flexible budgets are dynamic. That is, they can be tailored to any level of activity within a relevant range. Using a flexible budget, a manager can look at the activity level actually attained, and then…
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