Final answer:
The main difference between a static budget and a flexible budget is that a static budget is set for one level of activity and does not change, while a flexible budget adjusts costs based on actual production levels. Static budgets are based on fixed costs and initial predictions, while flexible budgets take into account variable costs that fluctuate with output. Therefore correct option is B
Step-by-step explanation:
The primary difference between a static budget and a flexible budget is that a static budget is prepared for a single level of activity, whereas a flexible budget is adjusted for different activity levels. To elaborate, a static budget does not change after it is set and is based on initial predictions and assumptions about the volume of production or sales for the budget period. In contrast, a flexible budget can adapt to changes in the level of activity, taking into account actual output levels. It will vary costs based on the actual production levels, reflecting the mix of fixed and variable costs within a business.
Understanding fixed costs, such as rent on a factory, provides insights into what comprises a static budget. These are costs that do not fluctuate with the level of production. For example, once you sign a lease, the amount remains constant, whereas budgets also need to consider variable costs, which change with production levels, such as raw materials. A flexible budget considers these variations and adjusts accordingly to provide more accurate financial planning and analysis.