Final answer:
A flexible budget is the one that reflects how costs and revenues will change with different volumes of output, including analysis of fixed and variable costs, average costs, and marginal costs to aid in profit-maximizing decisions.
Step-by-step explanation:
A flexible budget is a budget that adjusts to a company's activity or volume levels. Unlike a static budget , which doesn't change from the amounts established when the company creates the budget, a flexible budget continuously changes with a business' cost variations. The budget that shows how budgeted costs and revenues will change over different volumes is known as a flexible budget. Unlike a static budget, which remains unchanged irrespective of the actual level of output or sales, a flexible budget adjusts to reflect changes in the volume of activity.
This dynamic nature allows firms to gain insight into their profitability under various scenarios by taking into account the division of total costs into fixed and variable costs, and using these to calculate the average total cost, average variable cost, and marginal cost. Consequently, this accommodates changes in sales and revenue, which are crucial for making decisions on the profit-maximizing quantity of production and pricing strategies.