Final answer:
Static budgets do not change when the actual volume of activity differs from the planned volume. Flexible budgets are designed to adjust based on changes in volume.
Step-by-step explanation:
When the actual volume of activity differs from the planned volume, static budgets do not change. A static budget is prepared based on a set level of activity or production, and it does not account for changes in actual volume. This means that if the actual volume is higher or lower than planned, the budget will not be adjusted to reflect these changes.
For example, if a company budgeted for 1,000 units of production but only produced 800 units, the static budget will remain the same as the planned budget for 1,000 units. This can lead to variances between the budgeted and actual results.
In contrast, flexible budgets are designed to adjust based on changes in the volume of activity. Flexible budgets are more responsive to changes in actual volume and provide better insights into the financial performance of a business.