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Understanding Flexible Budgets You have been a loyal employee of NRG Corporation for 16 years. In December of 2018, you were excited to be promoted to Profit Center Manager, where you gained the responsible for the profits and losses of NRG's time of energy drink products. The product line's master budget was created and approved prior to your start date as the manager, but with the entire fiscal year 2019 still ahead, you had the chance to prove your worth and value as a manager. Two months into your new role, a few other segments were discontinued by NRG Corporation for poor performance and operating losses. As a result, your product line not only had to assume some of the plant-wide costs that were previously allocated to the discontinued products, but you felt pressure to perform well so that the energy drink line, and possibly your job, would not be dropped too. As such, you spent much time on the job focusing on understanding and reducing costs, where possible. Starting with the Sales Team, you encouraged the salesforce to find the balance between selling more volume but offering less discounts, as it had become rather commonplace to offer discounts at the start of a sales pitch as opposed to only when needed to close the deal. You worked with the Sales Manager to discuss sales strategies and broadening the search for potential new customers. After working with the Sales Team, you met with the Production Manager to discuss cost-cutting and efficiency measures on the production floor. These efforts included meeting with suppliers to get a better deal on raw materials and purchasing better, more productive manufacturing equipment. You were already locked in for rent for the facility, but you worked with Corporate Procurement to shop around on insurance for factory assets and encouraged simple cost-cutting measures such as turning off lights at night and using security cameras to reduce theft of raw materials. You also dedicated some of your time to ensuring your assembly line workers were not only qualified to do the work, but were efficient and effective with their time and resources. You implemented some small incentivize to try to reduce attrition of your skilled workers. After a year on the job, your boss, Jennifer Riley, scheduled a meeting to discuss your first year's performance. To your surprise, she indicated that she was not very pleased with the results of the NRG energy drink line. This was largely because the operating income was less than expected; she provided the following performance report for your review and scheduled a meeting to further discuss the results of the energy drink line and your performance as a manager. NRG Corporation Energy Drink Performance Report For the Year Ended December 31, 2019 Actual Data Master Budget Variance ($) *F/U 180,000 $ 11,520,000 175,000 11,375,000 5,000 145,000 F F $ $ $ $ $ 6,210,000 1,746,000 810,000 2,754,000 6,125,000 1,750,000 875,000 2,625,000 85,000 4,000 65,000 129,000 129.000 U F F F ד ד Sales: Volume (number of cases) Revenue (standard: $65 per case) Variable expenses: Direct Materials (standard: $35 per case) Direct Labor (standard: $10 per case) Variable Overhead (standard: $5 per case) Contribution Margin Direct Fixed Expenses: Direct Fixed Overhead Direct Operating Expenses Segment Margin Common Fixed Expenses: Allocated Factory Expenses Operating Income (Loss) • Favorable Variance (F) / Unfavorable Variance (U) ד 535,000 120,000 2,099,000 540,000 110,000 1,975,000 5,000 10,000 124,000 : F ד c c $ 1,750,000 349,000 $ 1,500,000 475,000 250,000 $ 126,000 U

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i Allocated factory expense is not under my control or my area of responsibility Only revenues and costs directly associated with my area of responsibility are under my control 2 My reaction is Boss has not seen my performance based on my area of responsibility He has seen Operating Income after allocation of factory expenses and my performance is adverse as per this Variance $180,000 Flexible Budget Performance Report Actual Flexible Results Budget Volume 180,000 180,000 Revenue $11,520,000 $11,700,000 Variable Costs Direct Material $6,210,000 $6,300,000 Direct Labor $1,746,000 $1,800,000 Variable Overhead $810,000 $900,000 Contribution Margin $2,754,000 $2,700,000 Direct Fixed overhead $535,000 $540,000 Direct Operating Expenses $120,000 Segment Margin $2,099,000 $2,050,000 $90,000 F $54,000 F $90,000 F $54,000 F $5,000 F -$10,000 U $49,000 F 4 The revised performance report is meaning full since actual results are compared with same level of activity (Flexible Budget) Sales Revenue is Unfavourable variance and performance has not been good Variable Cost variance is favourable and performance has been exceptional Fixed Cost variance is adverse Overall Margin is favourable variance 5 Sales variance has been adverse during the year. Selling price budgeted is $65 where as actual is $64 This variance needs to be investigated further as to why actual selling price is reduced Cost performance has been exceptionally good. Overall there is favourable variance of $234,000 Direct Operating expenses has been unfavourable. This can be investigated further Memo to Ms. Riley Positive aspects of performance The performance of the team on cost has been exceptional during the period. All variable costs are under control In Fixed overhead cost Direct Fixed overhead is favourable Regarding Direct Operating expenses it will be investigated as to why it is unfavourable Further improvements Sales performance during the period has been unfavourable compared with flexible budget The reason is lower selling price. Reason for lower selling price than budget will be investigated further and corrective action will be taken in next period. The marketing team is currently working on this.