Which statement best describes the difference between static and flexible budgets?

Which statement best describes the difference between static and flexible budgets?

• A. A flexible budget adjusts for actual activity levels; a static budget remains fixed.
• B. Both budgets are fixed and do not change with activity.
• C. A static budget is fixed at one level of activity; a flexible budget adjusts for actual activity levels.
• D. Flexible budgets ignore activity changes.

Answer: (C)

The key idea being tested is how budgets respond when actual activity varies. A static budget is built for a single planned level of activity and does not change if actual activity differs. A flexible budget, by contrast, is designed to reflect the actual level of activity; it is recalculated to show what costs and revenues would be at the actual activity level. This makes it much more useful for analyzing variances between what was planned and what actually happened. So the best description is that a static budget is fixed at one level of activity, while a flexible budget adjusts for actual activity levels. The other phrasings either imply that both budgets stay fixed or that the flexible budget ignores activity changes, which is not accurate.

The key idea being tested is how budgets respond when actual activity varies. A static budget is built for a single planned level of activity and does not change if actual activity differs. A flexible budget, by contrast, is designed to reflect the actual level of activity; it is recalculated to show what costs and revenues would be at the actual activity level. This makes it much more useful for analyzing variances between what was planned and what actually happened.

So the best description is that a static budget is fixed at one level of activity, while a flexible budget adjusts for actual activity levels. The other phrasings either imply that both budgets stay fixed or that the flexible budget ignores activity changes, which is not accurate.