How does a fixed operating budget usually operate?

A fixed operating budget typically operates by being based on the previous year's budget without adjustments. This means that the budget is set at a specific amount and does not change with variations in actual production or sales levels throughout the budget period. The purpose of a fixed budget is to provide a consistent financial framework for management to follow and to establish a clear expectation of costs and revenues for the upcoming period.

In this context, the budget does not account for fluctuations in volume or activity, so any increase or decrease in actual output would not affect the total budgeted amounts. This type of budget is particularly useful in stable environments where expenses and revenue do not vary significantly and can promote accountability by clearly delineating how much funds are allocated for different operational needs.

Other options, while they represent different budgeting strategies, do not align with the concept of a fixed operating budget. A flexible budget, for instance, adjusts to changes in activity levels, and thus would not be classified as fixed. Justification for expenditures may apply to other budgeting methods, especially those focused on performance management, while inflation adjustments are merely one way some budgets can be structured but do not correlate with the fixed nature of a fixed operating budget.