Case Study Undergraduate 725 words

Static and Flexible Budgets: Green Pastures Case Study

~4 min read 5 sections Accounting · Budget Analysis

Abstract

This paper analyzes the static and flexible budgets of Green Pastures for the 2017 financial year. It identifies the primary causes of the decline in net income, including a reduction in boarding days and a decrease in the daily boarding fee from $25 to $20. The paper evaluates management's performance in controlling both variable and fixed expenses, noting poor variable cost control but effective management of fixed costs. A flexible budget income statement is presented and interpreted, and recommendations are offered regarding cash flow monitoring and cost control to improve the company's competitive position.

Key Takeaways

Introduction to the Budget Comparison: Overview of static vs. flexible budget framework
Static Budget Analysis: Causes of sales decline and management performance
Flexible Budget for Green Pastures: 2017 flexible budget income statement and interpretation
Variable and Fixed Expense Control: Variance analysis of variable and fixed cost items
Recommendations for Management: Cash flow monitoring and cost control suggestions

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What makes this paper effective

The paper clearly distinguishes between the static and flexible budget frameworks, walking through both with supporting calculations that anchor the analysis in concrete numbers.
It explicitly evaluates management performance, differentiating between areas of poor performance (variable expense control) and areas of strength (fixed cost management), which demonstrates critical thinking.
The closing recommendation is grounded in the analysis, connecting cash flow monitoring to the specific budget variances identified earlier in the paper.

Key academic technique demonstrated

This paper demonstrates variance analysis — the technique of comparing actual results to budgeted figures to identify favorable and unfavorable differences. By computing percentage changes and dollar variances for individual line items, the author builds a structured argument about where management succeeded and where it fell short, rather than relying on general assertions.

Structure breakdown

The paper is divided into two main sections mirroring the two budget types. The static budget section opens with a narrative explanation of variances, uses percentage calculations to quantify the sales decline, and evaluates management decisions qualitatively. The flexible budget section then presents a formatted income statement, recalculates the daily boarding rate, and reassesses variable and fixed expense performance before closing with a practical recommendation for management action.

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Essay 725 words

Introduction to the Budget Comparison

This analysis examines both the static and flexible budgets for Green Pastures for the 2017 financial year. By comparing actual results against budgeted figures, the evaluation identifies the primary drivers of the decline in net income and assesses management's effectiveness in controlling both variable and fixed expenses. Understanding the difference between static and flexible budgets is essential for accurately diagnosing where and why financial performance deviated from plan.

Static Budget Analysis

The primary causes of the loss in net income were linked to the decline in the number of boarding days and the decrease in the boarding fee. There was a decline in the number of boarding days by 2,900. In addition, the boarding fee declined from $25 to $20 per day. Consequently, this resulted in a decline in sales of:

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

Taking this into consideration, management did a poor job with respect to controlling variable expenses. Given that boarding days declined by 13 percent — that is, (2,900 / 21,900) × 100 = 13 percent — there was also a diminishing impact on variable expenses. This confirms that management did not adequately control variable costs relative to the volume change.

In contrast, management performed well in controlling fixed costs. The fixed expenses incurred were below the budgeted amount by $4,000, even after accounting for extra costs incurred for advertising and entertainment. The decisions made by management in order to remain competitive were likely sensible and rational. Given the decline in boarding days, the decision not to replace a departing worker was reasonable and sound. The decision to reduce rates was likely driven by the level of competition in the market. Had management not increased expenditure on advertising and entertainment, the net income loss may have been considerably less severe.

Flexible Budget for Green Pastures

The following is the flexible budget income statement for Green Pastures for the year ended December 31, 2017. A flexible budget adjusts expected revenues and costs to reflect the actual level of activity, providing a more accurate basis for evaluating management performance.

Green Pastures — Flexible Budget Income Statement
For the Year Ended December 31, 2017

Activity Measure

Number of Mares: Actual 52 | Master 60 | Difference 8 U
Number of Boarding Days: Actual 19,000 | Master 21,900 | Difference 2,900 U

Sales
Actual: $380,000 | Master: $547,500 | Difference: $167,500 U

Contribution Margin: Actual $201,610 | Master $354,780 | Difference $153,170 U

Net Income: Actual $21,610 | Master $170,780 | Difference $149,170 U

The primary causes of the decline in net income encompass the decline in boarding rates together with the reduction in volume. The actual daily rate was $20, calculated as $380,000 / 19,000 = $20. This rate resulted in a decline in sales revenue of $95,000, equivalent to 20 percent, computed as: 95,000 / 475,000 = 20%. Given that the company operates in a highly competitive environment, had the rates not been reduced, there would likely have been a further decline in boarding days.

2 Sections Hidden · 200 words

Variable and Fixed Expense Control110 words

The management of Green Pastures did a poor job in controlling variable expenses. With the exception of supplies, all items of variable expenses were…

Recommendations for Management90 words

The recommended course of action for the management of Green Pastures is to implement closer observation and monitoring of cash flow and operational planning. Within a successful business, the cash flow cycle begins with cash…

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Key Concepts in This Paper

Static Budget Flexible Budget Budget Variance Variable Expenses Fixed Expenses Contribution Margin Boarding Days Net Income Decline Cost Control Cash Flow Management