The primary use of a flexible budget is in performance evaluation, for a correct comparison between budgeted performance, and actual performance.
Static budget, the common type of budget is for a single level of activity and cause variance when actual output varies from the expected output in the budget. If the actual output is more than the budgeted output, or if the company produces and sells more products than expected, variable costs such as raw material costs, sales commissions, shipping costs, and others increase, and if actual output is less than the budgeted output variable costs decrease. Reliance on static budgets might actually lead to the conclusion of the company having improved its finances when the cause for such improvement might be the decline of sales. Similarly, a static budget showing an increase in expenses, oblivious to such increased expense coming from increased sales, might be interpreted as bad management. A flexible budget reflects expected costs as a function of business volume and removes this distortion in performance evaluation.
For instance, comparison of an actual output of 10,000 units with a static budget that estimates an output of 9,000 unit leads to distortions, for the total budgeted costs for 9,000 units being less than the actual cost for 10,000 units might indicate improved financial control when the opposite might be the case. For a real comparison, the budget should also cater to 10,000 units. Flexible budgets have projections for several output-levels, and if the actual output is 10,000, choosing the budget prepared for an output of 10,000 units for comparison with the actual line values remove all distortions.