Title ABC/123 Version X 1 Green Pastures Static Budget Incom

Title ABC/123 Version X 1 Green Pastures Static Budget Income

Title ABC/123 Version X 1 Green Pastures Static Budget Income Statement For the Year Ended December 31, 2017 Actual Master Budget Difference Number of Mares U Number of Boarding Days 19,900 U Sales $380,000 $547,500 $167,500 U Less: Variable Expenses Feed 104,500 5,110 F Veterinary Fees 58,700 6,862 F Blacksmith Fees 4,000 F Supplies 10,867 F Total Variable Expenses 178,330 F Contribution Margin 201,170 U Less: Fixed Expenses Depreciation 40,000 -0- Insurance 11,000 -0- Utilities 12,000 2,000 F Repairs and Maintenance 10,000 1,000 F Labor 88,000 7,000 F Advertisement 12,000 4,000 U Entertainment 7,000 U Total Fixed Expenses 180,000 F Net Income $21,610 $170,780 $149,170 U

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The financial performance of Green Pastures equine facility for the year 2017 highlights significant variances between the static budget projections and actual results, particularly in net income. This analysis aims to explore the primary causes of these discrepancies, evaluate management's expense control, assess strategic decisions, and propose future actions based on flexible budget insights.

Introduction

Budgeting is a critical managerial tool that provides a financial framework for evaluating performance, planning operations, and guiding strategic decisions. The static budget, prepared at the start of the fiscal year, offers a benchmark against which actual results are compared. Significant deviations can signal underlying issues or opportunities that warrant further investigation. In the case of Green Pastures, discrepancies in revenue and expenses, especially in sales and variances within fixed expenses, led to substantial differences in net income between budgeted and actual figures.

Analysis of the Static Budget Variance

Primary causes of the loss in net income

The static budget indicated a projected net income of $170,780, whereas actual net income was only $21,610, resulting in a negative variance of $149,170. The most prominent factor contributing to this variance was the shortfall in sales revenue. Actual sales were $380,000, significantly below the budgeted $547,500, a decrease of $167,500. This decline likely stemmed from several factors, including reduced customer demand, seasonal fluctuations, or increased competition, which impacted the facility’s ability to generate expected revenues, particularly from boarding services. The decrease in sales directly diminishes contribution margin, thereby pressure-testing overall profitability.

Additionally, variable expenses, although significantly lower than budgeted, remain proportionate to the reduced sales figures. The actual variable expenses of $178,330 were below the budgeted $547,500, but considering the lower sales volume, this reduction was appropriate and indicates effective expense control relative to lower activity levels.

Management's expense control efficacy

Examining fixed expenses reveals a mixed performance. While depreciation and insurance expenses aligned with expectations, some variable costs such as veterinary fees, blacksmith fees, supplies, repairs, and labor exhibited variances. Notably, utilities and entertainment expenses exceeded their budgeted amounts, adding to costs without contributing directly to revenue. Expenses on advertisements also surpassed the planned budget increase, which may have been an effort to boost sales that did not realize the anticipated results.

Overall, management demonstrated an averaging ability in controlling expenses. Fixed costs were mostly contained within planned limits, and variable expenses adjusted reasonably with the decline in sales. However, overspending on area-specific costs like utilities and entertainment suggests areas where stricter control could enhance profitability.

Strategic decision-making and competitiveness

The decision to maintain fixed expenses such as salaries, insurance, and depreciation indicates a strategic choice to preserve operational capacity despite lower revenues. Staying competitive by retaining staff, maintaining facilities, and advertising incurs fixed costs that, while adding to expenses during poor performance periods, also positions the business for future recovery and growth.

Nevertheless, the significant revenue shortfall points to a need for strategic reassessment, including marketing initiatives or service diversification, to bolster sales rather than solely controlling expenses. The decision to sustain fixed costs demonstrates a commitment to long-term competitiveness, albeit at the expense of short-term profit.

Flexible Budget Analysis and Recommendations

Primary causes of net income variances based on the flexible budget

The flexible budget adjusts the static budget to actual activity levels, allowing for a more accurate performance evaluation. If the flexible budget indicates that variable expenses should have decreased proportionally with lower boarding days and Mares, but fixed expenses remained relatively unchanged, it confirms that the primary cause of net income loss was revenue shortfall. The actual lower sales volume means the facility operated with fewer boarding days, thus driving down revenue and contribution margin. Any overspending on fixed expenses, such as utilities and entertainment, further exacerbated profitability issues.

Effectiveness of expense management illustrated by flexible budgeting

The flexible budget reveals that management did a reasonable job controlling variable expenses tailored to actual activity levels. However, fixed expenses like utilities and entertainment exceeded expected amounts, indicating areas where cost control could be improved. These variances suggest a need for stricter expense management policies or renegotiation of service contracts to enhance financial performance.

Recommendations for management

Based on the analysis, the following strategies are recommended:

• Implement dynamic expense control measures, especially for fixed costs such as utilities and entertainment, to reduce unnecessary spending during periods of low activity.
• Enhance marketing efforts and diversify services to stimulate revenue growth, thereby reducing dependence on boarding fees alone.
• Introduce performance-based incentives for staff to improve operational efficiency and customer satisfaction.
• Develop contingency plans that allow rapid adjustment of expenses in response to fluctuations in activity levels.
• Leverage technology to monitor expenses continually, enabling proactive financial management.

Conclusion

The financial analysis of Green Pastures' 2017 performance underscores the critical importance of flexible budgeting and active expense management. While the decline in revenue was the primary cause of net income shortfall, management's moderate expense control efforts mitigated some negative impacts. To restore profitability and sustain competitiveness, strategic marketing, cost control, and operational flexibility are vital. By adopting these recommendations, Green Pastures can better adapt to future challenges and optimize its financial health.

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