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Green Pastures is a farm located in the State of Kentucky Bluegrass (Kimmel, Weygandt, Kieso, 2016). They are known for their specialized boarding of mares and foals. However, based on industry changes, there has been a decline in breading activities, which has made this business extremely competitive market (Kimmel, Weygandt, Kieso, 2016). Therefore, management had to be more creative with their marketing approach for client entertainment, advertisement, and sales. The farm’s management team has a new approach in 2017 to meet the demand and attract new customers.
Static Budget Report
Loss in Net Income
The primary cause of the loss in net income was the changes implemented in 2017 by the Green Pastures management team (Kimmel, Weygandt, Kieso, 2016). Boarding days were changed from 21,900 to 19,000, with a total decrease of 2,900. Also, boarding fees changed from $25 to $20 per ride, which resulted in a reduction of revenue of $167,500. The calculations:
a) Budget; $547,500 (sales revenue) ÷ 21,900 (boarding days) = $25 (per ride)
b) Actual; $380,000 (sales revenue) ÷ 19,000 (boarding days) = $20 (per ride)
Based on the Statistic Budget Report, which reflects that variable expenses were not managed very well throughout the year. The performance of the management team controlling these variable expenses is poor, as there was a decrease in boarding days. This change should have yielded a greater reduction in variable expenses. The variable expense only reduced by $14,330. However, the fixed expenses demonstrate that management did a great job in controlling those expenses and stayed under budget by $4,000 (Kimmel, Weygandt, Kieso, 2016). This total includes the loss of an employee in March 2017, whose management decided not to replace him or her. Management utilized the labor savings cost for new advertisements and entertainment of clients.
Decision to Stay Competitive
Management’s decisions to stay competitive was sound (Kimmel, Weygandt, Kieso, 2016). The idea was great, and the approach would have been better if the changes were analyzed further before implementation to determine downstream impacts. The decrease in boarding days was a significant hit to revenue for Green Pastures. The competition drove this precipitated decision and try to meet the demands in the market. However, there was a right management decision to try to remedy the existing losses, such as when the employee quit in March 2017, he was not replaced and yielded a reduction in labor cost that was favorable.
Flexible Budget Report
Cause of Loss in Net Income
The flexible budget report for 2017 demonstrates the primary cause of loss in net income was the changes implemented by management to stay competitive (Kimmel, Weygandt, Kieso, 2016). The reduction in volume and cost per boarding pass impacted Green Pastures total sales. The boarding pass rate change implemented is $20 =$380,000 (sales revenue) ÷ 19,000 (boarding days). This rate change yielded an unexpected reduction of revenue of $95,000, which was very unfavorable for the organization. However, based on this market is extremely competitive if management had not reduced the rates in boarding cost there may have been a more significant decline in business, as customers would have gone to a different farm to acquire similar services at a lower rate.
Management Controlling Expenses
Unfortunately, in this analysis of the flexible budget report, the results reflect that management did not do an excellent job in controlling the variable expenses (Kimmel, Weygandt, Kieso, 2016). Variable expenses were over budget by $11,190. All variable expenses ran over budget except for supplies, which remained under budget by $272 for the year. However, the controlling of the fixed expenses demonstrates that management did a fantastic job and remained under budget by $4,000 for the year.
Management’s Decisions to Stay Competitive
The management team at Green Pastures decision to stay competitive was sound (Kimmel, Weygandt, Kieso, 2016). They could have analyzed there situation better instead of reacting so precipitated based on the extremely competitive market of operation. However, the approach taken was needed because they did not want to lose customers to the competition. This approach appeared financially secure and safe for Green Pastures to continue to stay competitive in the market of operation.
Recommendations for Management
Since the “boarding business is extremely competitive,” management should consider other approaches to improve existing business (Kimmel, Weygandt, Kieso, 2016, p. 1112). Management should evaluate all the different boarding businesses and what they offer clients. Clients are always looking for who will offer the best service at a lower cost.
The first recommendation is to improve the existing boarding business and offer the best service in the industry. In addition, by enhancing the boarding experience for clients with additional benefits not offered by any other competitor. Customers will pay a little extra if they feel they are getting more for their dollar. Therefore, if this new enhancement is appealing and more pleasurable for clients, this will help increase the volume and sales of boarding passes increasing revenue for the organization.
The second recommendation is to provide the lowest boarding cost for clients opening the opportunity to attract new customers because of the lowest rates. This reduction will allow the company to maintain service, as is. However, attracting new customers who are looking for the same experience at a lower cost. Expected results increase the volume and sales, which will drive revenue increase for the organization.
After extensively analyzing both the statistic and the flexible budget I have identified that the organization needs to conduct an impact analysis before making changes to boarding days and cost, which at the end of the day are driving the organization’s revenue. Conducting this analysis will allow the organization the opportunity to determine if the change will yield favorable results they are looking to achieve. In addition, the controlling of variable expenses within the organization is not very favorable, as budgets are set up to follow them and ensure the organization stays in line with the goals established. The management team needs to focus their attention more on variable expenses incurred and ensure the organization does not go over budget. The solution is to have tighter controls established by executive management at Green Pastures to ensure future favorable results.
- Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons. Retrieved from https://phoenix.vitalsource.com/#/books/9781119244929/
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