7.2: Static Budget
A static budget is prepared for a period of time based on a fixed amount of activity. For example, the Packing Department in a manufacturing company may prepare a budget that itemizes fixed and variable costs.
|
Variable costs: |
|
|
\(\ \quad \quad\)Packing materials |
$30,000 |
|
\(\ \quad \quad\)Direct labor |
15,000 |
|
\(\ \quad \quad\)Variable utilities cost |
5,000 |
|
\(\ \quad \quad\quad \quad\)Total variable costs |
$50,000 |
|
Fixed costs: |
|
|
\(\ \quad \quad\)Supervisor salary expense |
$60,000 |
|
\(\ \quad \quad\)Depreciation expense |
7,000 |
|
\(\ \quad \quad\)Machine rental expense |
3,000 |
|
\(\ \quad \quad\quad \quad\)Total fixed costs |
$70,000 |
|
Total budgeted costs |
$120,000 |
This departmental budget does not specify the number of units to be processed, making it difficult to determine if actual costs are reasonable and within budget. Actual costs may wind up being higher than what was budgeted. For example, actual costs of $130,000 might seem unfavorable since it exceeds total budgeted costs of $120,000. However, more units may have been processed than were considered in preparing the budget. In that case, being over budget may actually be a positive outcome since additional production costs were the result of more sales orders.
The assumptions underlying the static budget are a bit vague. Even if the number of anticipated units to be processed were stated, such as a quantity of 10,000, the budget would remain unchanged if production volume were higher or lower. The lack of detail behind how the numbers are derived often limits the usefulness of the static budget information.