Definition of Fixed Budget
A fixed budget is a budget that does not change or flex for increases or decreases in volume. (“Volume” could be sales, units produced, or some other activity.) A fixed budget is also known as a static budget.
Example of Fixed Budget
To illustrate a fixed budget, let’s assume that a company pays a 5% sales commission on all of its sales. If the company prepares a fixed budget and it is projecting sales of $1 million, the budget for sales commissions will be fixed at $50,000. If the actual sales end up being only $900,000 the budget for sales commissions will remain unchanged at the fixed amount of $50,000. If the actual sales are $1,100,000 the budget for sales commissions will also be $50,000.
Had the company prepared a flexible budget, the budget for sales commissions would be expressed as 5% of sales. This means that the budget for sales commissions will be $50,000 only when sales are $1 million. If the company has actual sales of $900,000, the budget for sales commissions will flex and will be $45,000 (5% of $900,000). If the actual sales are $1,100,000 the budget for sales commissions will be $55,000.
FAQs
A fixed budget is a budget that does not change or flex for increases or decreases in volume. (“Volume” could be sales, units produced, or some other activity.)
What is the definition of a fixed budget? ›
A fixed budget is a budget that remains uniformly unaffected irrespective of changes in the volume of sales, revenue, no of units produced, or production. It doesn't change with a change in actual output. It is also called a static budget.
Who uses a fixed budget? ›
This type of budget is best suited for nonprofit and government organizations because their revenues and expenses stay the same over time. However, any business can use a static budget as long as they know how much money they will earn versus how much they will spend.
What is an example of a fixed expense? ›
Fixed expense examples
Here are some common fixed expenses: Rent or mortgage payments. Car payments. Insurance premiums (auto, home, renters, health, dental, life, etc.)
What is the difference between a fixed budget and a flex budget? ›
Goal adaptability: A fixed budget gives you a structured approach to long-term goal planning, while a flexible budget allows you to adapt your financial goals based on changing circ*mstances or immediate needs.
What are examples of fixed cost? ›
Fixed costs tend to be costs that are based on time rather than the quantity produced or sold by your business. Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments. Some kinds of taxes, like business licenses, are also fixed costs.
What are the disadvantages of a fixed budget? ›
Of course, there are disadvantages to fixed budgets as well.
- They lack leeway. Fixed budgets cannot adapt to changing business conditions. ...
- They discourage growth. Requiring managers to stick rigidly to previously set numbers may prevent beneficial new spending.
- They lower morale. ...
- They result in waste.
How to Budget on a Fixed Income: Smart Strategies for Stability
- Understand Your Income. It may sound obvious, but the first step in budgeting on a fixed income is understanding exactly how much money you have coming in each month. ...
- Catalog Your Expenses. ...
- Prioritize Savings. ...
- Manage Debt Wisely. ...
- Plan for the Future.
It is produced for a single level of activity, i.e. based on estimated production. Comparison of a fixed budget with the actual results for a different level of activity is of little use for budgetary control purposes.
Which kind of budget is the most commonly used? ›
Incremental budgeting
It is the most common type of budget because it is simple and easy to understand. Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year.
In the 50/20/30 budget, 50% of your net income should go to your needs, 20% should go to savings, and 30% should go to your wants.
Are groceries a fixed expense? ›
Fixed expenses generally cost the same amount each month (such as rent, mortgage payments, or car payments), while variable expenses change from month to month (dining out, medical expenses, groceries, or anything you buy from a store).
How much of income should go to fixed expenses? ›
Fixed expenses 50%
These unchanging costs should stay within 50% of your monthly income. Choose housing, transportation, and monthly subscriptions you can afford to sustain without draining your wallet.
What is a fixed budget in simple terms? ›
A fixed budget is a budget that does not change or flex for increases or decreases in volume. (“Volume” could be sales, units produced, or some other activity.) A fixed budget is also known as a static budget.
When should you flex a budget? ›
Flexible budgeting happens at the beginning of a budgeting period—revenue, costs, and profit are forecast across a range of activity levels. With this information, a flexed budget can then be created at the end of the budget period based on the actual activity level.
What are realistic budgets? ›
A realistic budget starts with determining your monthly income and then calculating all of your monthly expenses. When determining income, use the amount you bring home after taxes and after any other deductions, such as child support, are taken out. Include all sources of income.
What is a fixed budget quizlet? ›
fixed budget (static budget) budget based on a single predicted amount of sales or other activity measure.
What is fixed in a basic budget? ›
For personal budgeting purposes, fixed expenses are the costs that you can forecast with confidence because they don't change from month to month or period to period. They tend to take up the largest percentage of your budget because they are things like rent or mortgage payments, car payments and insurance premiums.
What is the definition of a flexible budget? ›
What is a flexible budget? A flexible budget is a budget that adjusts to a company's activity or volume levels. Unlike a static budget , which doesn't change from the amounts established when the company creates the budget, a flexible budget continuously changes with a business' cost variations.
What is a fixed price budget? ›
The difference between Fixed Price budget and the other budget types is that a Fixed price project has a particular scope of work that you bill at a set price, no matter how long it takes to complete.
