What is a flexible budget?

A flexible budget is designed to adapt to varying levels of activity within an organization, making it an essential tool for management accounting. This budgeting approach allows businesses to adjust their budgeted revenues and expenses according to actual activity levels, which provides a more accurate and relevant financial picture.

When actual output differs from the expected output, the flexible budget recalibrates itself to reflect this change, enabling management to assess performance more accurately. This adaptability is particularly useful in environments where sales volumes, production levels, or service demands fluctuate significantly.

Unlike a fixed budget—which remains unchanged regardless of actual activity—a flexible budget reflects changes, allowing businesses to make informed decisions based on a more realistic comparison between actual and expected performance. This feature aids in identifying variances and understanding how costs behave in relation to activity levels, ultimately contributing to more effective financial planning and control.