Which type of budget adjusts based on changes in activity levels?

The type of budget that adjusts based on changes in activity levels is the flexible budget. A flexible budget is specifically designed to accommodate variations in activity, allowing for adjustments to be made in revenues and expenses as actual levels of activity fluctuate. This adaptability makes it a valuable tool for managers, as it provides a more accurate reflection of performance in relation to actual operational conditions.

In contrast, a fixed budget remains constant regardless of changes in activity, meaning it may not reflect the true costs or revenues when performance deviates from the original assumptions. A capital budget focuses on long-term investments and planned expenditures for significant projects, while an operating budget typically outlines projected income and expenses for a specific period, often with specific activity levels in mind, but without the inherent flexibility to adjust for changes in those activity levels. Thus, a flexible budget is the most effective option for responding to varying operational circumstances.