What characterizes a flexible budget?

A flexible budget is characterized by its ability to adjust based on changes in production volume or activity levels. This adaptability allows for more accurate performance evaluation by comparing actual costs and revenues against the budgeted amounts that reflect the actual level of activity.

When production volume rises or falls, a flexible budget recalibrates itself to reflect these changes, enabling managers to see how costs behave relative to varying levels of output. Fixed and variable costs are differentiated, allowing the budget to account for variable costs that change with production levels while maintaining fixed costs steady. Therefore, the flexibility of the budget is crucial for effective management and decision-making.

In contrast, the other options do not accurately describe the nature of a flexible budget. Static budgets, for example, remain unchanged regardless of variations in activity levels, which makes them less suitable for performance management in dynamic business environments. Moreover, a budget that is set only once a year does not accommodate the need for adjustments throughout the financial period, and a budget focused exclusively on fixed costs does not capture the comprehensive variability that flexible budgets offer.