Which statement explains the difference between static and flexible budgets?

The statement that a static budget remains unchanged regardless of actual activity levels, while a flexible budget adjusts based on actual activity, accurately captures the fundamental difference between the two types of budgets.

A static budget is prepared based on estimated revenues and expenses for a specific level of activity. Once it is established, it does not change even if the actual level of activity differs from what was anticipated. This can lead to variances, as the budget may not accurately reflect the costs and revenues associated with actual performance.

In contrast, a flexible budget is more adaptable and allows for adjustments to financial projections based on actual activity levels. It enables organizations to evaluate performance more accurately by recalibrating budgetary expectations in response to changes in production or sales volumes. This adjustment helps management to assess efficiency and effectiveness by comparing actual costs against a budget that reflects what those costs should be at the actual level of output.

Thus, the distinction is crucial for effective management accounting, as it influences performance evaluation and decision-making based on varying levels of business activity.