A static budget is an operating budget that shows expected results of operations for several activity levels.
True
False
The correct answer and explanation is:
Correct Answer: False
Explanation (Approx. 300 words):
A static budget is an operating budget that shows the expected results of operations for only one level of activity, not several. Therefore, the statement is false.
A budget is a financial plan that outlines expected revenues and expenses over a specific period. It serves as a guide for organizations to manage resources and evaluate performance. Budgets can be static or flexible, and understanding the difference is crucial for accurate financial planning and performance evaluation.
A static budget, also known as a fixed budget, is prepared before a period begins and is based on a single level of expected activity — typically the most likely or planned level of operations. It does not change in response to actual activity levels. For instance, if a company creates a static budget assuming it will sell 10,000 units, the budgeted revenues and costs are based solely on that number, regardless of whether actual sales are higher or lower.
Because static budgets remain unchanged, they are most useful in environments where costs and revenues are relatively stable and predictable, or for expenses that are fixed (like rent or salaries). However, they become less effective in dynamic environments where actual activity can vary significantly from planned activity.
In contrast, a flexible budget adjusts for different levels of activity. It provides a more accurate tool for performance evaluation because it considers the actual level of output or sales, making it easier to identify variances due to performance versus those caused by volume differences.
In summary, a static budget does not show expected results for several activity levels — it reflects only one expected level. Therefore, the correct answer to the statement is False.