The Watch and Timepiece Division of Geraldo Jewelers had significant problems in 2021. Sales and production were down by almost 35 percent as compared with the budget. Manufacturing was plagued by quality problems and had frequent customer complaints. Timothy Atlee, the division’s manager, recently received a report comparing his division’s actual costs with the costs in the master budget prepared at the start of 2021. Surprisingly, actual costs were less than budgeted, indicating favorable variances. 

Timothy was upbeat when told that the president had scheduled a meeting with him to discuss the Watch and Timepiece Division’s performance. Although sales were down, at least he could point to a large number of favorable cost variances. 

Required 

Briefly explain why the variances are positive, and discuss what Timothy should know about flexible budgets. Assuming that the president understands flexible budgets, will the president be impressed by the favorable cost variances?