Question

What is the difference between a fixed budget and a variable budget?

• A. Fixed budget includes only fixed costs, while a variable budget includes only variable costs.
• B. Fixed budget is concerned only with future acquisitions of fixed assets, while a variable budget is concerned with expenses which vary with sales.
• C. Fixed budget cannot be changed after the period begins, while a variable budget can be changed after the period begins.
• D. Fixed budget is a plan for a single level of sales (or other measure of activity), while a variable budget consists of several plans, one for each of several levels of sales (or other measure of activity).

Answer 1

The correct option is D Fixed budget is a plan for a single level of sales (or other measure of activity), while a variable budget consists of several plans, one for each of several levels of sales (or other measure of activity).

Based on the capacity , budget can be classified as fixed budget and flexible budget.

Fixed budget are static budget which remains constant , irrespective of the level of activity i.e budget is prepared on a standard volume of output.

On the other side, flexible budget is prepared for different level of production. Flexible budget changes with the level of activity. It is prepared on various level of output. It is more sophisticated than the static budget.