What defines a flexible budget?

A flexible budget is designed to adjust expenses based on actual production levels or activity. This means that as the volume of production varies, the budget recalibrates to reflect those changes, allowing for a more accurate assessment of performance against the planned budget. This flexibility is particularly useful for businesses to analyze variances in costs, as it provides relevant comparisons between what the costs should have been for the actual level of output versus what was originally budgeted.

This approach enables managers to understand the efficiency of operations based on actual activity levels, making it easier to pinpoint areas needing attention or improvement. By focusing on the relationship between costs and production levels, flexible budgets help businesses respond to changes in demand more effectively, ensuring better financial management.