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What are some criteria you would use to choose between a fixed and a flexible budget?
Static Budget: Shows the expected results of a responsibility center for only one activity level. [ Once the budget is made, it is not changed, even if the activity level changes. Flexible Budget: shows the expected results of a responsibility center for several activity levels. The flexible budget is more accurate than the static budget because budget amounts adjust for changes in activity.A
static budget is prepared and used throughout the year to compare with actual performance. A flexible budget is prepared early in the year, comparisons are made each month and the budget is adjusted to take into account new information and estimation errors. It is also called a rolling budget. You make a new one every monthFixed Budget is mainly used in the planning stage to define the broad objectives of management. Flexible budget, on the other hand is prepared for the volume of activity actually achieved, in other words the controlling stage. The reason why we had flexible budget is because for most of the time, the level of activities differ and as a result, the fixed budget differs by a lot from the actual result. ]
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