Question

Analyze the advantages and disadvantages of a (a) stable production policy and (b) stable inventory policy for a company that has greatly fluctuating sales during the year regarding a master budget and a flexible budget.

Answer 1

First, what is a static budget? It's a budget that is prepared at the beginning of the year and not changed until it's time to make a new one at the start of the next year. A static budget is just that – static. The numbers do not change for the entire year, regardless of anything that happens in the business environment.

A flexible budget, on the other hand, is a series of budgets prepared for various levels of activities, revenues and expenses. Flexible budgets get modified during the year for actual sales levels, changes in cost of production and virtually any other change in business operating conditions. This flexibility to adapt to change is useful to owners and managers