Fixed budget is a financial plan that does not get a modification with the variations in the business activities. We also call it a static budget. https://efinancemanagement.com/budgeting/fixed-budget

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https://efinancemanagement.com/budgeting/fixed-budget
Fixed Budget

2. 1. Meaning
2. Example
3. Fixed Budget Variance
4. Advantages
5. Drawbacks
6. How to Overcome Drawbacks?
7. Reference
Content

3. Fixed budget is a financial plan that does not get a modification with the variations in the business activities. We also call
it a static budget.
In the real world, the fixed budget may not hold much relevance because businesses do witness a significant variation in
activities than what they estimate initially. Thus, the budget is likely to be very different from the actual numbers. Because
of this difference, there is a big variation between the budget and actual numbers.
Meaning

4. Suppose Company A pays a sales commission on the total sales and prepares a fixed budget and estimates total sales of
$500,000, and thus, fixes a commission of $50,000. Now, even if the actual sales are more or less than the estimates, the
sales commission figure in the budget will not change.
Example

5. A company using a fixed budget must focus on reducing this variance year after year. It compares the variance of one
budget period with the last one, to check if its estimates are getting better or not. If not, the company should try to
change its estimation methods. Also, the company must review its past revenue and expenses to come up with a better
budget.
Fixed Budget Variance

6. Fixed budget are beneficial in following cases:
• When expenses are big & remain same over time.
• When revenues are predictable.
• If a firm exists in an industry where consumer demand doesn’t change much.
Advantages

7. Some drawbacks of fixed budget are:
• Estimates are not accurate.
• Does not help when there is a need to allocate additional resources to keep up with the rise in demand.
• Based on past budgets.
• Difficult to evaluate the performance of the departments.
Drawbacks

8. Few ways to overcome drawbacks are:
 Continuous budgeting
 Reduce the period
 Flexible budget
How to Overcome Drawbacks?

9. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/budgeting/fixed-budget