According to AccountingTools chief, Stephen Bragg, there are a variety of issues and problems with both of the two kinds of budgets: static and flexible. A static budget is: “A budget that is completed prior to the budgeted periods being forecasted, and which is fixed for the entire period covered by the budget, with no changes based on actual activity.”  In turn, a flexible budget is: “A budget that calculates different expense levels based on changes in the amount of actual revenue.”

1. Static budgeting issues
   1. Line managers only do it once/year thus inexperienced
   2. Gaming: an attempt: to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates.”
   3. Time required developing and updating; are all line items in synch? “It can be very time-consuming to crete a budget, especially in a porly-organized environment where many iterations of the budget may be required.”
   4. Becomes obsolete quickly
      • Variances get bigger and therefore the is budget ignored
   5. Always wrong since it is static
      • ” If the business environment changes to any significant degree, then the company’s revenues or cost structures may change so radically  the actual results will rapidly depart from expectations delineated in the budget.”
   6. Connection with strategy?
   7. Expense allocations: “The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation method used.”
   8. Revenue impact on capacity
      • step functions
      • timing
   9. Command and Control System:  “The single most fundamental problem underlying the entire concept of a budget is that it is designed to control a company from the center.  The basic under pinning of the system is that senior management forces managers throughout the company to agree to a specific outcome.”   Examples include targets for revenue, expenses, profit, cash flow or metrics.
   10. Only considers financial outcomes: “The nature of the budget is numeric, so it tends to focus management attention on the quantitative aspects of  a business;”
   11. Bureaucratic support: Once the budget and bonus plan system takes root within a company, a bureaucracy develops around it that has a natural tendency to support the status quo.”  Examples cited include human resources, accounting, analysts and investment community.
   12. Production budgeting:
       1. capacity constraints: “When formulating the production budget, it is useful to consider the impact of proposed production on the capacity of any bottleneck operations in the production area.”  Possible bottlenecks cited include machine time, skilled labor, availability of raw materials and step costs.  “All of the factors noted in this section are major concerns, and should be considered when you evaluate the viability of a production budget.” (Bold added.) The example cited is that of machine time (page 47) and involves a manual calculation of the solution: “However, Quest can increase production in earlier periods to make up the shortfall since there is adequate capacity available at the bottleneck in the earlier periods.”  NOTE: In the trade press, this is referred to as build ahead.  There are a variety of other possible solutions including OT, a second shift, outsourcing and adding machine capacity.
       2. for multiple products: “How do you create a production budget if you have multiple products?  The worst solution is to attempt to re-create in the budget a variation on the production schedule for the entire budget period.” (Bold added.)  Solutions suggested include bottleneck focus, product line focus, 80/20 rule and MRP II planning.”
   13. Sales/marketing budget driven by forecast
       • “construct this budget after most of the other departments have completed their preliminary budgets.”
2. Flexible budgeting issues:
   1. Formulation
      1. difficult to formulate and administer
         1. many costs are not fully variable
            • they have fixed and variable components
            • they vary across quantity ranges
         2. costs vary by a variety of things including labor, purchase quantities, product batch sizing, time and experience
      2. great deal of time to develop cost formulas
         1. so flexible budget tends to include only a small number of variable cost formulas
   2. Closing delays: “you cannot pre-load a flexible budget into the accounting sw for comparison to the financial statements. Instead you must wait until a financial reporting period has completed, then input revenue and other activity measures into the budget model, extract the results from the model.,  Only then can you issue financial statements that contain budget vs. actual information, with the variances between the two.  This delays the issuance of financial statements.”
   3. No revenue comparisons: “In a flexible budget there is no comparison of budgeted to actual revenues, since the two numbers are the same.:
   4. Applicability: few variable costs for the firm