The first step in preparing a flexible budget is to:

• A. Identify Activity Levels
• B. Set Fixed Costs
• C. Compute Standard Costs
• D. Determine Selling Price

Answer: (A)

In a flexible budget, costs are driven by activity, so the first step is to identify the activity level you expect (such as units produced or hours worked). Knowing the planned activity provides the anchor for all cost estimates, since variable costs rise and fall with that activity, while fixed costs stay within the relevant range. Once the activity level is identified, you can apply cost behavior to project costs at that level and then adjust for other activity levels as needed. Determining selling price affects revenue, not the initial setup of cost behavior in a flexible budget, and setting fixed costs or computing standard costs naturally follows after the activity level is established.