Flexible budget is a projection of budget data for various levels of activity. In essence, the flexible budget is a series of static budgets at different levels of activity. The flexible budget recognizes that the budgetary process is more useful if it is adaptable to changed operating conditions.
To develop the flexible budget it is necessary to: (a) Identify the activity index and the relevant range of activity. (b) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (c) Identify the fixed costs and determine the budgeted amount for each cost. (d) Prepare the budget for selected increments of activity within the relevant range. Flexible budget reports permit an evaluation of a manger’s performance in controlling production and costs.