ACCA Performance Management (F5) Certification Practice Exam

What defines a flexible budget?

1. A budget that remains constant regardless of activity

2. A budget that adapts to the volume of activity

3. A budget that is difficult to calculate

4. A budget focusing solely on fixed costs

The correct answer is: A budget that adapts to the volume of activity

A flexible budget is characterized by its ability to adjust to changes in the level of activity or volume of operations. This adaptability means that as actual levels of activity increase or decrease, the budget can be recalibrated to reflect those changes and provide a more accurate forecast of revenues and expenses. This quality is particularly useful for performance evaluation, as it allows management to compare actual results against budgeted figures that are realistic for the actual level of activity undertaken, rather than relying on a static budget that may not reflect what was realistically achievable. In contrast, a budget that remains constant regardless of activity would be a fixed budget, which does not provide an accurate assessment of performance when conditions change. A budget focusing solely on fixed costs would also limit its effectiveness since it would ignore variable costs that change with activity levels. Lastly, while some budgets might be complex, the ability to adapt them does not inherently make a flexible budget difficult to calculate; rather, it is designed to provide relevant information based on actual activity levels. Thus, the ability to adapt to the volume of activity clearly defines a flexible budget.