What is the main advantage of using a flexible budget?

The main advantage of using a flexible budget is that it allows for better performance evaluation under varying activity levels. A flexible budget dynamically adjusts based on changes in the volume of activity, providing a more accurate comparison between actual performance and budgeted performance. This adaptability means that as actual levels of activity fluctuate, the budget can be modified to reflect those changes, allowing management to assess how well resources are utilized even when operations do not align with original forecasts.

In contrast, static budgets remain fixed regardless of changes in activity, which can lead to misleading variances. When volume increases or decreases, performance evaluations based on a static budget may not accurately reflect the company's efficiency or effectiveness. By using a flexible budget, businesses can better pinpoint areas of strength or weakness, leading to more informed decision-making and strategic adjustments.

The ability to incorporate different levels of activity makes flexible budgets particularly useful for companies with varying production levels or seasonal fluctuations, ultimately enhancing their operational planning and control.