Final answer:
A budget based on actual activity is a flexible budget, adjusting to the volume of activity for better financial planning. Static and master budgets differ in their flexibility and purpose, while budgeting difficulty often arises due to trade-offs with discretionary spending.
The Correct Option is; b) flexible budget.
Step-by-step explanation:
A budget that is based on the actual activity of a period is known as a flexible budget. This type of budget is advantageous because it adjusts for changes in the volume of activity, allowing for more precise and relevant financial planning and analysis.
On the contrary, a static budget does not change once set, even if the actual activity differs from the anticipated level. A master budget is an overall financial and operating plan for a forthcoming period, usually a fiscal year, while a continuous budget is a rolling plan that is continuously updated.
When creating a flexible budget, it's important to consider that budgeting can be a challenging task due to the temptation of discretionary expenses such as daily trips to Starbucks or subscription services, which can be seen as opportunity costs.