Flexible Budget and Variance Analysis

Problem

Alps Pastures is a 400-acre farm on the outskirts of New Zealand, specializing in the boarding of broodmares and their foals. A recent economic downturn in the thoroughbred industry has led to a decline in breeding activities, and it has made the boarding business extremely competitive, to meet the competition, Alps 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 2019 is presented below. As shown, the static income statement budget for year is based on an expected 21,900 boarding days at $25 per mare. The variable expenses per mare per day were budgeted: fee $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.

Alps Pastures

Static Budget Income Statement

For the year ended December 31, 2019

Actual Master Budget Difference

Number 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: Variavle expenses

Feed 104,390 109,500 5,1110 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 Variables Exp. 178,390 192,720 14,330 F

Contribution margin 201,610 354,780 153,170 U

Less: Fixed expenses

Depreciation 40,000 40,400 -

Insurance 11,000 11,000 -

Utilities 12,000 14,000 2,000 F

Repairs & 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 Exp. 180,000 184,000 4,000 F

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

Required:

A. Based on the static budget report:

1. What was the primary causes of the loss in net income?
2. Did management is good, average, or poor job of controlling expense?
3. Were management's decision's to stay competitive sound?

B. Make 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 Alps Pastures?