What is a flexible budget?

A flexible budget is designed to adjust based on actual activity levels, which allows for more accurate performance evaluation and cost control. This type of budget can be particularly useful for businesses that experience varying levels of sales or production, as it enables managers to compare actual results to what the budgeted amounts would have been at those actual levels of activity.

For example, if a company's production increases, a flexible budget will account for the increased variable costs associated with that activity, providing a more relevant basis for analysis. This responsiveness makes it a vital tool for identifying inefficiencies or variances in costs that might not be visible in a static budget. By contrast, a budget that remains fixed regardless of activity levels does not offer the nuance needed to assess performance effectively in a dynamic business environment.