- Solution :
The major weaknesses of a static planning budget include the following:
- Static budgets are geared only to a single level of activity.
- Static budgets cannot be used to assess whether variable costs are under control.
- Static budgets force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity.
- Solution :
The characteristics of a flexible budget include the following:
- A flexible budget takes into account how changes in activity affect costs.
- It is an estimate of what revenues and costs should have been, given the actual level of activity for the period.
- When used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.
