Meaning Of Fixed Budget

Before you can understand the term fixed budget, first, know the meaning of the two words fixed and budget. The word Fixed means firm or stable, while budget is an estimate of economic activities of the business organization. With the above illustration, we can define Fixed Budget as an estimate of pre-determined incomes and expenditures of a business, which when prepared, it does not change with the variations in the levels of activity achieved. Fixed budget is also referred to as Static Budget.

Fixed Budget is best practiced by the organisations where there are fewer chances of fluctuations in the prevailing conditions or if the organisation is not influenced by the change which comes from external factors and the forecasting can be easily done to give close results. It also serves as a yardstick to costs control.

Fixed Budget helps the management of a business to set the revenues and expenses for a given period, but it lacks accuracy. This is because very difficult to correctly determine future needs and requirements. Furthermore, fixed budget operates only on a single activity level under one condition. While preparing the fixed budget, it is difficult to measure the performance, efficiency or capacity because it is assumed that the existing conditions will not be changed shortly, which proves untrue.