Fixed Budget | Definition | Features

Definition of fixed Budget

The Institute of Costs and Management Accounts (U.K) defines a fixed budget as

“Fixed budget are those that are drafted to remain the same regardless of the activity levels it actually attained.”

A fixed budget is prepared for single level of activity. The performance report is prepared by comparing data from actual operations. Fixed budget do not change when production level changes.

Features of Fixed budget

The following are the features of fixed budget

1. Fixed budget is rarely prepared and used. The reason is that the actual output is differing from the budgeted output. Hence, the management cannot exercise cost control.

2. The performance report does not contain useful information and misleading one.

3. If units are overlooked in the cost-to-cost comparison, accurate result is not available.

4. The performance report gives merely whether the actual costs are higher or lower than budgeted costs.

5. Fixed budget is limited by the costs and expenses which are affected by fluctuations in volume. This is a well known accepted fact.

6. There is no meaning of comparing one activity level with some other activity level. A fixed budget can be usefully employed when budgeted output is close to the actual output.

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