What characterizes a flexible budget?

A flexible budget is characterized by its ability to adjust for varying levels of activity. This means that as actual activity levels—like sales volume or production—fluctuate, the flexible budget recalibrates to reflect these changes. For instance, if a company anticipates higher production levels than originally planned, a flexible budget allows for adjustments in variable costs, which would increase with more production. This adaptability provides management with a more accurate picture of expected financial performance based on current operating conditions.

In contrast, a static budget remains unchanged regardless of changes in activity, making it less useful for performance evaluation when actual results differ from projections. A flexible budget does not solely focus on fixed costs; it includes both fixed and variable expenses, allowing for a more comprehensive view of cost behavior. By excluding variable costs from analysis, one loses critical insights into how costs respond to changes in business activity, which is essential for effective budgeting and management decision-making.