What is a static budget?

A static budget is defined as a budget that is prepared for a specific level of activity and does not change, regardless of the actual activity levels that occur. This budget is based on assumptions made about future operations and does not adjust to reflect fluctuations in sales volumes or production.

The key aspect of a static budget is its singular focus on this predetermined level of activity, making it useful for evaluating performance at that level. It allows organizations to establish clear benchmarks against which actual results can be measured. However, it can be less useful in settings where significant variability in activity levels occurs, as it does not reflect the financial implications of these deviations.

In contrast to static budgets, flexible budgets adjust to actual activity, which can provide a more accurate comparison between expected and actual performance. Understanding this concept helps in grasping the purpose and limitations of static budgets in financial planning and analysis.