Final answer:
The static budget is based on the estimated sales volume determined at the beginning of an accounting period, serving as a benchmark for performance evaluation.
Step-by-step explanation:
The static budget is typically based on an estimated level of sales volume that was determined at the beginning of an accounting period. This means that the correct answer to the student's question is option 1. A static budget is set before the period begins and does not change, even if actual sales volume differs from the estimated levels. It serves as a benchmark against which actual performance can be compared. For example, if a company expects to sell 10,000 units in a year, the static budget will be built around this sales volume prediction. The expenses and revenues in the static budget will reflect the cost and income of selling this quantity of goods or services.
To provide a clearer context, let's consider the concept of base year in real statistics, such as real GDP. The base year is the reference point for prices used in calculations to maintain consistency over time. Similarly, the static budget is set at the beginning of the accounting period and serves as a reference point for that period. When considering something like the annual budget deficit or surplus, which is determined at the end of a fiscal year, this illustrates the difference between budgeting practices and the evaluation of fiscal performance.