Define a flexible budget and explain how it differs from a static master budget.

Define a flexible budget and explain how it differs from a static master budget.

• A. Flexible budget adjusts costs with activity; static master budget is fixed for a single planned level.
• B. A flexible budget does not change with activity; static budget adjusts for actual activity.
• C. Flexible budget is for cash flow; static budget is for profitability.
• D. Flexible budget adjusts costs with activity; static master budget is fixed for a single planned level.

Answer: (D)

A flexible budget is built to adjust for different levels of activity. It presents costs and revenues as functions of activity, usually as fixed costs plus a variable cost per unit, so you can see what would happen at actual activity and analyze variances accurately. This makes it useful for performance review because it reflects how costs should change as activity changes. A static master budget, by contrast, is prepared for a single planned level of activity and stays unchanged if actual activity differs. When activity varies, the static budget doesn’t match reality, which can distort variance analysis. So the best description is that the flexible budget adjusts costs with activity, while the static master budget is fixed for a single planned level.

A flexible budget is built to adjust for different levels of activity. It presents costs and revenues as functions of activity, usually as fixed costs plus a variable cost per unit, so you can see what would happen at actual activity and analyze variances accurately. This makes it useful for performance review because it reflects how costs should change as activity changes.

A static master budget, by contrast, is prepared for a single planned level of activity and stays unchanged if actual activity differs. When activity varies, the static budget doesn’t match reality, which can distort variance analysis.

So the best description is that the flexible budget adjusts costs with activity, while the static master budget is fixed for a single planned level.