Managerial Analysis Of Green Pastures Static Budget Income

Managerial Analysis of Green Pastures Static Budget Income Statement for 2017

The purpose of this paper is to conduct a comprehensive managerial analysis of Green Pastures’ static budget income statement for the year ended December 31, 2017. This analysis will identify the primary causes of variances in net income, evaluate management’s expense control and strategic decisions, and recommend appropriate courses of action based on flexible budgeting insights. This evaluation incorporates a detailed comparison between actual financial results and the master budget, along with an assessment of management's operational efficiency and decision-making effectiveness.

Understanding the Static Budget and Actual Results

The static budget for Green Pastures reveals significant discrepancies between projected and actual financial outcomes. The total sales revenue fell short by $167,500, with actual sales at $380,000 against a budgeted $547,500. This decline significantly impacted the bottom line, which is a crucial starting point for evaluating managerial performance. In addition to reduced sales, variable expenses showed favorable variances, totaling $178,330 under budget. Fixed expenses, however, largely aligned with or exceeded expectations, contributing further to the variance in net income.

Analysis of Variance in Net Income

Primary Causes of the Loss in Net Income

The substantial decrease in sales revenue primarily explains the drop in net income, with actual sales being approximately 69% of the budgeted figures. The decreased sales volume could stem from several factors, including reduced demand, ineffective marketing efforts, or external market conditions. While variable expenses were significantly lower than expected—saving $178,330—these savings were insufficient to offset the revenue shortfall. The expenses that remained close to budgeted levels, particularly fixed expenses such as depreciation and insurance, further compounded the impact of decreased sales.

Expense Control Evaluation

Management demonstrated good expense control in the variable expenses domain, successfully reducing costs for feed, veterinary fees, blacksmith fees, supplies, and entertainment. These variances suggest effective operational efficiency, likely due to tighter cost management or favorable market conditions for suppliers. Conversely, fixed expenses such as repairs and maintenance, labor, and advertisement exceeded budgeted amounts, indicating less effective control over fixed costs or increased operational needs. The overspending in these areas notably diminished profitability, even amid favorable variable expense variances.

Assessment of Management’s Strategic Decisions

Decisions to stay competitive through advertising and entertainment expenditures—although resulting in overspending—reflect management’s strategic focus on sustaining market presence. However, the significant shortfall in sales indicates that these efforts may not have effectively translated into increased revenue, questioning the overall effectiveness of strategic initiatives. An alternative approach could involve targeted marketing campaigns or diversification strategies to better capitalize on market opportunities and improve sales performance.

Flexible Budget Analysis

Developing the Flexible Budget

To better understand operational performance, a flexible budget adjusts static budget estimates based on actual activity levels—here, the actual number of mares and boarding days. For 2017, the actual number of mares and boarding days was lower than anticipated, which is consistent with the reduced sales revenue. Adjusting expenses in accordance with the actual activity levels reveals that variable expenses decreased proportionally, aligning with the lower operational activity. This demonstrates that variable costs behave as expected, confirming operational efficiency in controlling these costs relative to activity levels.

Variance Analysis Based on Flexible Budget

Using a flexible budget highlights that the primary variance in net income is attributable to the lower-than-expected sales volume. While variable expenses were managed well, fixed expenses remained high, and some increased compared to the flexible budget, suggesting inefficiencies or unplanned expenditures. The overspending in fixed costs restricted the potential positive impact of variable expense savings, leading to a net loss despite favorable operational control.

Recommendations for Green Pastures Management

Based on the analysis, several strategic recommendations can be made. First, the company should investigate the root causes of declining sales. Market research, customer feedback, and competitive analysis can help identify gaps in service offerings or marketing strategies. Upscaling promotional efforts and diversifying revenue streams—such as offering new services or expanding target markets—may counteract current sales shortfalls.

Second, management should reinforce cost control measures, especially concerning fixed expenses. Exploring opportunities for operational efficiencies, renegotiating supplier contracts, or reassessing staffing needs could reduce fixed costs and improve profit margins.

Third, adopting a more dynamic budgeting approach—such as regular periodic revisions—can provide real-time insights into financial performance, allowing managers to implement corrective actions proactively. Implementing technology-driven tools such as financial dashboards can encourage ongoing monitoring and rapid response to variances.

Lastly, fostering a culture of continuous improvement and strategic agility will be vital. This includes staff training, strategic planning sessions, and establishing clear performance benchmarks aligned with operational goals. These measures, combined with data-driven decision-making, will enable Green Pastures to enhance its competitive position and improve profitability in future periods.

Conclusion

The analysis of Green Pastures’ 2017 financial performance underscores the importance of robust managerial control, strategic decision-making, and flexible budgeting. While operational expenses were well-managed relative to activity levels, the significant sales shortfall resulted in considerable net income loss. Strategic focus should therefore shift toward sales enhancement, cost optimization, and adaptive planning to sustain profitability. Accurate variances analysis and responsive management practices will be essential for future financial stability and growth.

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