What is the definition of flexible budgeting?

Flexible budgeting is defined as a budgeting approach that adjusts budgeted revenues and expenses based on actual activity levels. This means that as the level of activity changes—whether that means higher or lower levels of production or sales—the flexible budget adjusts accordingly to reflect these changes in operational activity.

This adaptability is crucial for organizations because it allows them to compare actual performance against a budget that is reflective of the real circumstances rather than a static budget that may not account for variations in activity. For example, if a company experiences an increase in sales volume, its flexible budget will update revenues and associated variable costs to reflect this reality, providing a more accurate picture of financial performance.

In contrast, other options describe budgeting methods that do not offer this level of responsiveness. Some focus only on fixed costs, while others remain rigid once established, not accounting for changes in the operational environment. Thus, option A effectively captures the essence of a flexible budgeting approach, emphasizing the importance of adjusting financial plans based on actual performance metrics.