Final answer:
Static budgets are developed around a single level of activity and are set regardless of changes in production levels, which makes them less flexible compared to variable budgets. They include fixed costs such as rent, which do not change with production volume, making them suitable for planning but less so for performance evaluation in variable production contexts.
Step-by-step explanation:
The question asks which statement is true of static budgets. The correct answer is that static budgets are developed around a single level of activity. Unlike flexible budgets that adjust to different levels of activity, static budgets are predetermined based on one level of activity and do not change in response to changes in activity levels. Static budgets can be quite useful for planning purposes, but they are less useful when it comes to performance evaluation of a company that experiences fluctuating levels of production or sales. It is important to understand fixed costs in the context of static budgets. Fixed costs, such as rent on a factory or lease payments, do not change with production levels, which makes them a key component of static budgets. If a business's costs are mostly fixed, static budgets can be more reflective of the actual costs the business will incur. However, for businesses with a significant amount of variable costs, which fluctuate with production volume, a static budget may not provide accurate predictions of costs across different activity levels.