What is a fixed budget?

A fixed budget is a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced.

Since most companies experience substantial variations from their expected activity levels over the period encompassed by a budget, the amounts in the budget are likely to diverge from actual results. The only situations in which a fixed budget is likely to track close to actual results are when:
Costs are largely fixed, so that expenses do not change as revenues fluctuate
The industry is not subject to much change, so that revenues are reasonably predictable
The company is in a monopoly situation, where customers must accept its pricing

Most companies use fixed budgets, which means that they routinely deal with large variations between actual and budgeted results. This also tends to cause a lack of reliance by employees on the budget, and in the variances derived from it.

A good way to mitigate the disadvantages of a fixed budget are to combine it with continuous budgeting, where you add a new budget period onto the end of the budget as soon as the most recent budget period has been concluded. By doing so, you gradually incorporate the actual results of the most recent period into the budget.

Another way to mitigate the effects of a fixed budget is to shorten the period covered by it. For example, the budget may only encompass a three-month period, after which management formulates another budget that lasts for an additional three months.

The fixed budget is not effective for evaluating the performance of cost centers. For example, a cost center manager may be given a large fixed budget, and will make expenditures below the budget and be rewarded for doing so, even though a much larger overall decline in company revenues should have mandated a much larger expense reduction. The same problem arises if revenues are much higher than expected - the managers of cost centers have to spend more than the amounts indicated in the baseline fixed budget, and so appear to have unfavorable variances, even though they are simply doing what is needed to keep up with customer demand.

The reverse of a fixed budget is a flexible budget, where the budget is designed to change in response to variations in activity levels. There tend to be much smaller variances from the budget when a flexible budget is used, since the model tracks much closer to actual results.

Similar Terms

A fixed budget is also known as a static budget.

Rolling budgets

A method of budgeting in which as each month passes, an additional budget month is added such that there is always a 12-month budget.


A rolling budget is a budget that is continually updated to add a new budget period as the most recent budget period is completed.


If a company uses participative budgeting to create its budgets on a rolling basis, then the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.


Advantages and Disadvantages of the Rolling Budget

This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.


What is continuous budgeting?

Continuous budgeting is the process of continually adding one more month to the end of a multi-period budget as each month goes by. This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.


What is incremental budgeting?
Saturday, December 11, 2010 at 10:19AM

Incremental budgeting is budgeting based on slight changes from the preceding period's budgeted results or actual results. This is a common approach in businesses where management does not intend to spend a great deal of time formulating budgets, or where it does not perceive any great need to conduct a thorough evaluation of the business.


The primary advantage of incremental budgeting is that it is simple to use, being based on either recent financial results or a recent budget that can be readily verified. Also, if a program requires funding for multiple years in order to achieve a certain outcome, incremental budgeting is structured to ensure that the funds will keep flowing to the program.

There are several downsides of incremental budgeting that make it a less than ideal choice. The issues are:
Incremental in nature. It assumes only minor changes from the preceding period, when in fact there may be major structural changes in the business or its environment that call for much more significant budget changes.
Fosters overspending. It fosters an attitude of "use it or lose it" in regard to budgeted expenditures, since a drop in expenditures in one period will be reflected in future periods, too.
Budgetary slack. Managers tend to build too little revenue growth and excessive expenses into incremental budgets, so that they will always have favorable variances.
Budget review. When the budget is carried forward with minor changes, there tends to be little incentive to conduct a comprehensive review of the budget, so that inefficiencies and budgetary slack are automatically rolled into new budgets.
Variance from actual. When the incremental budget is based on a prior budget, there tends to be a growing disconnect between the budget and actual results.
Perpetuates resource allocations. If a certain amount of funds were allocated to a specific business area in a prior budget, then the incremental budget assures that funding will be allocated there in the future, too - even if it no longer needs as much funding, or if other areas require more funding.
Risk taking. Since an incremental budget allocates most funds to the same uses every year, it is difficult to obtain a large funding allocation to direct at a new activity. Thus, incremental budgeting tends to foster a conservative maintenance of the status quo, and does not encourage risk taking.

In short, incremental budgeting results in such a conservative mindset in a business that it may actually be a noticeable driver in destroying a company over the long term. You should instead engage in a thorough strategic re-assessment of a business when constructing a budget, as well as a detailed investigation of expenditures. The result should be significant changes in the allocation of funds from period to period, as well as targeted operational changes that are intended to improve the competitive position of a business.

Flexible Budget

A set of revenue and expense projections at various production or sales volumes. The cost allowances for each expense are able to vary as sales or production vary.


FLEXIBLE BUDGET is based upon different levels of activity. It is a very useful tool for comparing actual costs experienced to the cost allowable for the activity level achieved, i.e. it is dynamic in nature as compared to static. A series of budgets can be readily developed to fit any activity level. Flexible budgeting distinguishes between fixed and variable cost, thereby allowing for a budget that can be automatically adjusted to the level of activity actually attained.


Flexible Budget
A budget that considers different levels of production or sales. A flexible budget makes different amounts available to departments depending on what production or sales are realized. For example, a flexible budget may make 6% more money available to its research and development department if its revenue increases 6%.