Assignment Content
Purpose of Assignment
This comprehensive case requires students to evaluate a static budget and prepare flexible budgets to meet managerial needs. Students are required to calculate and analyze variances and discuss how variances are critical to managerial decision making.
Resources
Green Pastures Static Budget Income Statement
Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Committee (SEC)
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Assignment Steps
Scenario: Green Pastures is a 400-acre farm on the outskirts of the Kentucky Bluegrass, specializing in the boarding of broodmares and their foals. A recent economic downturn in the thoroughbred industry has led to a decline in breeding activities, and it has made the boarding business extremely competitive. To meet the competition, Green Pastures planned in 2017 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.
The budget report for 2017 is presented as an attachment. As shown, the static income statement budget for the year is based on an expected 21,900 boarding days at $25 per mare. The variable expenses per mare per day were budgeted: feed $5, veterinary fees $3, blacksmith fees $0.25, and supplies $0.55. All other budgeted expenses were either semifixed or fixed.
During the year, management decided not to replace a worker who quit in March, but it did issue a new advertising brochure and did more entertaining of clients.
Develop a 700-to 1050-word examination of the financial statements and include the following based on the static budget report:
What was the primary cause(s) of the loss in net income?
Did management do a good, average, or poor job of controlling expenses?
Were management’s decisions to stay competitive sound?
Prepare a flexible budget report for the year.
Based on the flexible budget report:
What was the primary cause(s) of the loss in net income?
Did management do a good, average, or poor job of controlling expenses?
Were management’s decisions to stay competitive sound?
What course of action do you recommend for the management of Green Pastures?
Show your work in Microsoft Word or Excel.
Complete calculations/computations using Microsoft Word or Excel.
Read: Green Pastures Static Budget Income Statement
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Managerial Analysis
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The primary cause(s) of the loss in net income
Looking at the static budget report, it was evident that Green Pastures’ net income dropped as a result of a declined in the number of boarding days as well as the boarding fee. Analysis showed that boarding days declined by about 13 % from 21,900 to 19,000 which is a decrease of 2,900 boarding days as shown in the computation below.
The boarding fees also declined by 20 % from $25.00 daily to $20.00 daily as shown in the computation below.
The overall reduction in sale revenue was $167,500 which is about 31 %. The computation of percentage is shown below.
The overall computations of boarding fees on a daily basis of during the two economies (healthy and downturn) are presented below.
Whether the management did a good, average, or poor job of controlling expenses?
Based on the outcome of the computation, one can conclude that the management did a poor job in managing variable expenses. A decline of approximately 13 % of boarding days should have led to reduction of variable expenses with a similar margin. The computation showed that variable expenses only declined by about half of the margin that was expected to decline as shown below.
This is a clear indication that the management did a shoddy job of controlling variable expenses. However, they did a good job in controlling fixed expenses because they were under budget by $4,000 despite the additional expenses that were incurred in entertainment and advertising.
Whether the management’s decisions to stay competitive were sound? The decision taken by the management to stay competitive were sound because as they reduced the boarding days, they took a bold decision………………………………………………………………………………………………
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