A fixed budget is the financial plan designed and implemented by the management that is not changed or altered throughout the accounting and budgeting period. It remains same and uniform even if the level of activity changes within the business. However in actual situation the activity level within the business changes from high to low and low to high as a result the budget diverges from the actual estimates and results. Fixed budget will track and fulfill the actual results in the situation where the costs are generally fixed and the expenses don’t vary with the fluctuating revenues. The industry in which the fixed budget is implemented is not subjected to change as a result there is no change in the fixed budget. The company is selling its products with a monopoly in the market as a result customers has to purchase their products at their predefined price that result in stability of the revenues.
In order to avoid the inaccuracies of the fixed budget a company must use this technique with continuous budgeting. In this technique a new budgeting period is added to the end of the budget as soon as the recent budgeting period is concluded by the business. Fixed budgeting technique cannot be used to evaluate the performance of the cost centers as it tends to appear unfavorable variance between the revenues and expenditures.
The technique that is reverse of that fixed budget is called flexible budgeting where the budget changes in response to the variation of activity level within the business.