What is the purpose of a flexible budget?

A flexible budget is utilized primarily to compare actual costs with expected costs at the actual level of activity. This type of budget adjusts to changes in volume or activity levels, allowing businesses to understand how their costs behave under varying circumstances. By setting flexible budgets based on actual performance, managers can analyze variances between what was budgeted and what was actually spent or earned, thereby facilitating better operational and financial decision-making.

The ability to adjust for actual output levels enables an organization to scrutinize how well it controls costs and how effectively it operates under different scenarios, making it an important tool in managerial accounting. Thus, it proves valuable for evaluating performance against set targets, leading to more informed strategic interventions when necessary.