Green Pastures. Cause of Loss. Accounting, Finance, SPSS Coursework
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)
Tutorial help on Excel® and Word functions can be found on the Microsoft Office website.
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 900-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.
Green Pastures
Static Budget Income Statement
For the Year Ended December 31, 2017
Actual Master Budget Difference
Number of Mares 52 60 8 U
Number of Boarding Days 19,000 21,900 2,900 U
Sales $380,000 $547,500 $167,500 U
Less: Variable Expenses
Feed 104,390 109,500 5,110 F
Veterinary Fees 58,838 65,700 6,862 F
Blacksmith Fees 4,984 5,475 491 F
Supplies 10,178 12,045 1,867 F
Total Variable Expenses 178,390 192,720 14,330 F
Contribution Margin 201,610 354,780 153,170 U
Less: Fixed Expenses
Depreciation 40,000 40,000 -0-
Insurance 11,000 11,000 -0-
Utilities 12,000 14,000 2,000 F
Repairs and Maintenance 10,000 11,000 1,000 F
Labor 88,000 95,000 7,000 F
Advertisement 12,000 8,000 4,000 U
Entertainment 7,000 5,000 2,000 U
Total Fixed Expenses 180,000 184,000 4,000 F
Net Income $21,610 $170,780 $149,170 U
Green Pastures
Student Name
Institutional Affiliation
Green Pastures
Introduction
Green Pasture’s financial health has been adversely affected by a recent economic downturn in the market. The management made various decisions in a bid to salvage its performance. The fees charged for boarding was reduced, resulting in losses in the business net income. Advertising and entertainment fees were increased, promoting the business popularity. Despite the management of variable expenses being good, fixed expenses were poorly managed. However, the company can overturn its fortunes by cutting its prices and reducing operational costs.
Cause of Loss
The loss reported in net income was primarily due to reduction in the boarding days in comparison to the case in the initial budget. Notably, this effect was because a master budget of an organization aggregates all the budgets of the lower levels within the company's functional areas (Ainsworth & Deines, 2019). The assumption made during the preparation of the master budget was that the boarding days would be 21,900, but the actual eventual number turned out to be only 19,000. The unexpected low number of boarding days resulted in a deficit of 2,900 days, marking a 13.24% decrease in boarding days. This would hurt the net income as projected.
The reduction in the boarding days’ number also caused a decline in the actual boarding fees, making it lower than the budgeted boarding fees. The boarding fee that was budgeted per day was $25, translating to $547,500 for the 21,900 budgeted days. However, this budget reduced to $20 per day, and so the new fee was $380,000 since the boarding days were only 19,000. Therefore, fee charged for boarding per day reduced by 20% ($5), resulting in the loss noted in the net income of the business.
Performance of the Managers in Controlling Expenses
The manager's management in monitoring the variable expenses was generally poor, but they performed well regarding controlling fixed costs. The computations in the first part above show that the boarding days reduced by 13.24%, but the variable costs were not reduced by the same proportion when they should have. The variable costs decreased by 7.44%, since they dropped from $192,720 to $178,390, suggesting that the management failed to control the variable costs and reduce it in the same proportion that the number of boarding days reduced. Therefore, the management's performance in managing the variable expenses was just poor.
However, the performance of the managers in monitoring the fixed expenses was better. The fixed costs were initially budgeted at $184,000, but the actual figure was $180,000, implying that the fixed costs reduced by $4,000. The decrease was due to the reduction in labor expenses (decreased by $7,000) and utilities, which fell by $2,000.
The soundness of the Decisions Made by the Managers
The management made sound decisions regarding staying competitive. One decision that the management made was reducing the boarding fees per day. Making this decision was in...
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