Why Do We Need a Flexible Budget?

Because actual activity is usually different from the planned activity.

If we compare:

Actual result at 7,000 units

vs

Original budget at 5,000 units

→ This comparison is not fair.

The flexible budget fixes this problem by adjusting the budget to the same activity level as actual.

Main purposes:

1. To make a fair comparison between actual and budget.
2. To help managers control costs.
3. To show whether differences are due to:

- Change in activity level, or

- Inefficiency / overspending.