HarborView Furniture Co. has to submit a Q2 operating plan for board approval and then live with it in monthly reviews. The starting point is clear. Budgeted Q2 sales are 5,000 units at $300 per unit, starting cash is $52,000, the board wants a target ending cash balance of $60,000, and management will not let cash drop below $40,000. The decision is not the math yet. The decision is which budget format becomes the baseline people get measured against and which format gets updated as reality changes.
A simple way to see the choice is to line up the moments HarborView uses the budget. Board approval needs a fixed baseline that can be voted on and referenced consistently. Monthly reviews need something that separates performance from volume. Periodic cost resets need a format that forces justification instead of last year plus a percent. Those are three different uses, and they often point to three different budget types for the same quarter. Map HarborView’s Q2 targets to those moments here:
Assume HarborView gets through April and discovers unit volume is not 5,000 for Q2 after all. Before we pick a budget type, we have to decide what we want the budget to do when actual volume differs. Do we want to keep the original 5,000-unit baseline unchanged so the board sees plan-versus-actual against the approved target, or do we want a budget that recomputes certain costs at the actual unit level so operating managers are not penalized or rewarded just because volume moved? Choose which format better fits each purpose before looking at the comparison.
A static budget keeps the original activity level fixed at the planned 5,000 units. That makes it a clean board baseline and a clean accountability document, but it blends together two effects in variances. One part is volume. The other part is how well managers controlled costs or pricing at whatever volume occurred. A flexible budget keeps the rules for variable and mixed costs but recalculates the budget at the actual volume, which makes variances more interpretable for monthly reviews. The tradeoff is workload and governance because the baseline can move during the quarter. Match the two budget types to the dimensions here: