alleryStart learning →What is the defining limitation of a static budget?
AIt separates fixed costs from variable costs
BIt is built on one fixed amount of activity
CIt must be revised every single month
DIt reports only cash inflows and outflows
Answer & Solution
Correct answer: B. It is built on one fixed amount of activity
1. A static budget is prepared for a period based on one fixed amount of activity.
2. It does not specify the number of units to be processed, so actual costs are hard to judge against it.
3. Even if a quantity were stated, the budget would not change when production volume turned out higher or lower.
4. Splitting fixed from variable costs is something a static budget does do, so it is not the limitation.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 7.2 Static Budget_
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