CSLB Contractor's Law & Business Practice Exam

What type of budget allows adjustments for monthly variations?

1. Strict budget

2. Flexible budget

3. Zero-based budget

4. Incremental budget

The correct answer is: Flexible budget

A flexible budget is specifically designed to accommodate changes in activity levels or other variables over a period, allowing for adjustments based on actual performance. This type of budget reacts dynamically to fluctuations in revenue or expenses, such as increases or decreases in the volume of work performed, making it particularly useful in industries like construction where project scopes and costs can vary significantly from month to month. By establishing a flexible budget, a contractor can modify their financial expectations and resource allocations to reflect real-time operational changes. This adaptability helps ensure better financial management and more accurate forecasting, allowing project managers to allocate funds effectively as actual results come in. In contrast, a strict budget does not allow for such changes and remains fixed regardless of performance. A zero-based budget requires justification for all expenses for each new period, starting from a "zero base," which does not inherently accommodate monthly variations. An incremental budget, while it involves minor adjustments based on the previous period's budget, lacks the responsiveness of a flexible budget to changes in operations or costs.