What method of budgeting allows for adjustments based on varying levels of activity?

Flexible budgeting is a method that allows for adjustments based on varying levels of activity, making it particularly effective for organizations whose outputs may change significantly over time. This approach provides a dynamic framework, creating budgets that can adapt to changes in revenue and expenses that are influenced by various operational levels.

For instance, if a business expects fluctuations in sales volume, a flexible budget helps management prepare more accurately for how those changes will impact costs and revenues. It categorizes costs into fixed and variable components, allowing for a better analysis of financial performance at different levels of engagement, thus helping leaders make informed decisions based on actual activity rather than static estimates.

In contrast, fixed budgeting remains static, regardless of changes in operational activity. Zero-based budgeting requires justification for every expense from scratch for each new period, without reference to previous budgets. Incremental budgeting adjusts the previous budget to account for small changes, but it doesn't allow for adjustments based on fluctuations in activity levels the way flexible budgeting does. This adaptability makes flexible budgeting a more versatile and responsive approach in dynamic business environments.