Which operating budget varies based on the number of units to be produced?

The flexible operating budget is designed to adapt to changes in the level of activity or production. This type of budget is particularly useful in a manufacturing context because it allows an organization to adjust its budgeted costs based on the actual number of units produced.

For instance, if a company produces more units than initially anticipated, the flexible budget will provide insights into the variable costs that will rise with production levels, such as raw materials and direct labor. Conversely, it will also reflect the cost savings when production is lower. This adaptability makes the flexible operating budget an essential tool for management, as it offers a more realistic view of financial performance in response to varying operational conditions.

In contrast, other types of budgets, such as fixed operating budgets and static operating budgets, remain unchanged regardless of production levels, which can lead to discrepancies between budgeted and actual performance when production levels fluctuate. The zero-based operating budget is based on justifying all expenses for each new period rather than adjusting prior budgets, further distinguishing it from the flexible approach.