Definition of Fixed Budget
A fixed budget is a budget that does not change or flex for increases or decreases in volume. (“Volume” could be sales, units produced, or some other activity.) A fixed budget is also known as a static budget.
Example of Fixed Budget
To illustrate a fixed budget, let’s assume that a company pays a 5% sales commission on all of its sales. If the company prepares a fixed budget and it is projecting sales of $1 million, the budget for sales commissions will be fixed at $50,000. If the actual sales end up being only $900,000 the budget for sales commissions will remain unchanged at the fixed amount of $50,000. If the actual sales are $1,100,000 the budget for sales commissions will also be $50,000.
Had the company prepared a flexible budget, the budget for sales commissions would be expressed as 5% of sales. This means that the budget for sales commissions will be $50,000 only when sales are $1 million. If the company has actual sales of $900,000, the budget for sales commissions will flex and will be $45,000 (5% of $900,000). If the actual sales are $1,100,000 the budget for sales commissions will be $55,000.
