This video discusses several advantages of flexible budgeting.
Flexible budgeting allows you to compare the company’s actual operating results to the results that should have occurred, given the actual activity level (e.g., the number of units sold). This is important, because comparing the actual operating results to the initial budget (the static planning budget) can be misleading since the planning budget was based on a certain activity level.
A flexible budget is most helpful when a company’s costs are strongly associated with the activity level. Once you’ve created the formulas necessary to create a flexible budget, you can also use these formulas beforehand (at the beginning of the period) to model what the budget would look like under various activity levels.