Which budget type is designed to adjust for changes in activity levels?

Which budget type is designed to adjust for changes in activity levels?

• A. Rolling budget
• B. Flexible budget
• C. Fixed budget
• D. Original budget

Answer: (B)

Flexible budgeting adjusts the budget to reflect different levels of activity or output. It works by estimating costs at the actual (or expected) activity level, with variable costs scaling up or down in line with activity while fixed costs stay consistent within the chosen range. This lets you compare what actually happened with what would be expected at the same level of activity, so variances are meaningful even when production or sales differ from the original plan. For example, if production rises, the flexible budget increases the budgeted materials and labour to match the higher output, rather than sticking to the original figures. Rolling budgets update over time but aren’t specifically tied to activity levels; fixed budgets remain unchanged; the original budget is simply the initial plan.

Flexible budgeting adjusts the budget to reflect different levels of activity or output. It works by estimating costs at the actual (or expected) activity level, with variable costs scaling up or down in line with activity while fixed costs stay consistent within the chosen range. This lets you compare what actually happened with what would be expected at the same level of activity, so variances are meaningful even when production or sales differ from the original plan. For example, if production rises, the flexible budget increases the budgeted materials and labour to match the higher output, rather than sticking to the original figures. Rolling budgets update over time but aren’t specifically tied to activity levels; fixed budgets remain unchanged; the original budget is simply the initial plan.