BYP10-2 Green Pastures is a 400-acre farm on the outskirts of the Kentucky Bluegrass, special- izing in the boarding of broodmares and their foals. A recent economic downturn in the thorough- bred industry has led to a decline in breeding activities, and it has made the boarding business extremely competitive. To meet the competition, Green Pastures planned in 2014 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.

The budget report for 2014 is presented below. As shown, the static income statement budget for the year is based on an expected 21,900 boarding days at $25 per mare. The variable expenses per mare per day were budgeted: feed $5, veterinary fees $3, blacksmith fees $0.25, and   supplies

$0.55. All other budgeted expenses were either semifixed or fixed.

During the year, management decided not to replace a worker who quit in March, but it did issue a new advertising brochure and did more entertaining of clients.1

 

Green Pastures

Static Budget Income Statement For the Year Ended December 31, 2014

 

	Actual		Master Budget		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

 

 

 

1Data for this case are based on Hans Sprohge and John Talbott, “New Applications for Variance Analysis,”

Journal of Accountancy (AICPA, New York), April 1989, pp. 137–141.

 

 

 

 

	Actual		Master Budget		Difference
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 F
Net income	$  21,610		$170,780		$149,170 U

 

                                                                                                

 

 

Instructions

With the class divided into groups, answer the following.

(a)  Based on the static budget report:

(1)   What was the primary cause(s) of the loss in net income?

(2)   Did management do a good, average, or poor job of controlling expenses?

(3)   Were management’s decisions to stay competitive sound?

(b)  Prepare a flexible budget report for the year.

(c)   Based on the flexible budget report, answer the three questions in part (a) above.

(d)  What course of action do you recommend for the management of Green Pastures?