Which type of budget adapts to changes in activity levels?

A flexible budget is specifically designed to adjust to changes in activity levels. This type of budget takes into account varying levels of output or sales, allowing for modifications in budgeted revenues and expenses as the actual levels of activity change. For instance, if a company experiences an increase in sales, a flexible budget can provide updated projections for revenues and costs that reflect that higher volume, enabling better financial management and decision-making.

In contrast, a static budget remains fixed regardless of changes in activity levels, making it less useful for organizations that may experience variable conditions. Capital budgets focus on long-term investment decisions rather than the nuances of day-to-day operational expenses. Operating budgets typically encompass a range of activities and may not specifically account for fluctuations in activity levels in the same adaptable manner as a flexible budget does. Thus, the ability of the flexible budget to reflect changing circumstances is what sets it apart as the correct answer in this context.