What characterizes a flexible budget?

A flexible budget is characterized by its ability to adjust for changes in the volume of activity. This means that as actual levels of production or sales change, the flexible budget can be recalibrated to reflect those changes, providing a more accurate comparison of budgeted to actual performance. This adaptability allows managers to analyze variances at different levels of activity, improving decision-making and performance evaluation.

For example, if a company originally planned to produce 1,000 units but ends up producing 1,200 units, a flexible budget would allow for the budgeted expenses and revenues to be adjusted to accurately reflect costs and revenues associated with producing and selling those additional units. This contrasts with static budgets, which remain unchanged regardless of actual activity levels, potentially leading to misleading assessments of performance.