The structure of budgets

Static and Flexible Budgets

Static Budget

The primary causes of the loss in net income were linked to the decline in the number of boarding days and also the decrease in the boarding fee. Imperatively, it can be noted that there was a decline in the number of boarding days by 2,900. In addition, the boarding fee declined from $25 to $20 daily. Consequently, this resulted in a decline in sales of:

(167,500 / 547,500) * 100 = 31 percent

Taking this into consideration, I believe that the management did a poor job with respect to controlling the variable expenses. Taking into account that the boarding days declined by 13 percent, that is (2,900 / 21,900) * 100 = 13, there was also a diminishing impact on the variable expenses. The inference of this is that the management indeed did a poor job in controlling variable expenses. In contrast, management did a good job with respect to controlling fixed costs. This is for the reason that the fixed expenses incurred were below the budgeted amount by $4,000 together with the extra costs incurred for advertising and entertainment. The decisions made by management in order to remain competitive in the market were probable sensible and rational. Taking into account the decline in boarding days, it can be perceived that the decision not to partake in the replacement of the worker was reasonable and sound. The decision to partake in the reduction of the rates was perchance instigated by the level of competition in the market. If management had not increased the expenses in advertising and entertainment, then the loss incurred in the net income may have been considerably better suited.

Flexible Budget

The following is a calculation of the flexible budget of Green Pastures for the 2017 financial year:

Green Pastures

Static Budget Income Statement

For the Year Ended December 31, 2017

Actual Master 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 U

Net Income 21,610 170,780 149,170 U

The primary causes of the decline in the net income encompass the decline in the boarding rates together with the volume. In essence, the everyday rate or charge was set at $20 computed by (380,000/ 19,000 = $20). In particular, this rate gave rise to a decline in sales revenue of $95,000, which is equivalent to 20 percent. Computed as follows: (95,000 / 475,000 = 20%). Based on the fact that the company is one that is largely competitive, if there had not been a reduction in the rates, then there would have without doubt been a further decline in boarding days.

The management of Green Pastures did a poor job in controlling variable expenses. With the exception of supplies, all items of the variable expenses were beyond the budgeted amount. In total, the variable expenses surpassed the budgeted amount by 11,190. However, as pointed out in section a, the management did a good job in the management of fixed expenses. The course of action that I recommend for the management of Green Pastures is to conduct the observation and monitoring of the cash flow and the plan. Basically, within a business that is successful, the cycle of the cash flow starts with cash utilized to attain resources and culminates in the collection of payments, with some of the revenue being invested yet again into the business itself or invested in new assets and resources. It is imperative to note that controlling costs is a challenging and daunting task and therefore should be highly considered. Therefore, it implies that there is room for improvement in terms of controlling costs to enable Green Pastures to continue operating in the marketplace and become competitive.