Discuss why activity-based flexible budgeting provide a more accurate prediction of costs than a traditional flexible budget
Activity-based flexible budgeting is more accurate if costs vary with more than one driver and the drivers are not highly correlated with direct labor hours (which is often the case).
If costs vary with respect to more than one driver, and the drivers are not highly correlated with direct labor hours, then the predicted costs by direct labor hours can be misleading.
The solution is to build flexible budget formulas for more than one driver. This multiple-formula approach allows managers to predict more accurately what costs ought to be for different levels of activity usage, as measured by the activity output measure.
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