Essay Sample on Primary Cause of Loss in Income

The primary cause of the loss of income is the reduction in boarding days c compared to the projected number of boarding days. The master budget had been organized with a presumption that the total number of boarding days would be 21900 boarding days, whereas the actual number of days was 19000. The resulting variance due to this was $2900; this is an unfavorable outcome. The variance indicates the adverse effect that arises because of the differences in the expected and actual no of days. The adverse change in days consequently affects income leading to loss (21900- 19000=2900(A)).

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

The budgeted boarding fees were again higher compared to the actual boarding fee paid. The budgeted boarding fees were $25 per boarding day ($547500/21900), whereas the actual boarding fee paid was $20 ($380000/$19000). The variance in boarding fees was adverse/unfavorable because the actual fee paid was lower than the projected.

Control of Expenses by Management

The management control of expenses was average, and it would have been better if the management focused on reducing expenses considering the net income was also lower. The management of expenses was poorly done, and the firm's management put little effort into reducing the costs. The reduction in variable expenses was $14,330 ($192,720-$178390). The low reduction in variable expenses indicates that the company's failure in reducing the variable expenses at the same rate that the boarding days reduced. However, the company effectively controlled fixed expenses. The budgeted fixed costs were $184000, whereas the actual expenses amounted to $180000.The positive variance indicates a favorable outcome.

The Decision to Stay Competitive

The management decision to increase competitiveness was well thought and sound. For instance, the decision to reduce boarding fees to increase income enabled the company to be more competitive. Moreover, the decision by the company not to replace the worker who left in March was sound as it reduced the costs withosut having a significant effect of labor in the company. The management decision to stay in the market was reasonable. The flexible budget report has been attached separately in an excel file. Refer to the file attached.

Flexible Management Report: Primary Cause of Loss of Income

The flexible management report is a type of budget report that helps managers to change their projections based on their expectations used in management development procedures. Based on the flexible budget report, the primary cause of the loss in net income was due to the unexpected reduction in boarding days and also boarding fees. The actual boarding fees reduced significantly as compared to the budgetary projections. The budgeted boarding fee was $25 ($547500/21900), whereas the actual boarding fee was $ 20 ($380000/19000). The company reduced boarding fees to remain competitive during a time that the company was suffering losses. The sales, therefore, reduced by $95000.The sales variance was favorable. ($475000-$380000)

Control of Expenses

According to the flexible budget report, the company's management still did not record a good performance in controlling variable expenses. However, the company did a great job in reducing the cost of the fixed expenses. The variable expenses reduced by $14330 (192270-178390). The flexible budget report indicates that the management failed to reduce variable expenses in the same ratio that boarding days reduced. The company's management did an excellent job of reducing the cost of the fixed expenses. The budgeted fixed costs were $184000, whereas the actual fixed expenses were $180000. The variance in costs was $4000(F). The favorable variance indicates that the company's means of controlling fixed costs were effective. Moreover, the advertising expenses were reasonable and did no attract huge costs.

Management Decision to Stay Competitive

The management decision that Green pastures remain competitive was justifiable due to the circumstances. Based on the flexible budget report, it is evident that Green pastures had to stay competitive to be able to market. However, some of the related decisions, which included the absorption of expenses, were very risky. Despite this, the company still tried to remain competitive during those times when the company was suffering huge losses.

Recommendations

Green pastures company should put a lot of effort into reducing the variable expenses. Moreover, it is recommended that the projection in the budgets is estimated fairly to avoid huge variances. The company should also focus on increasing sales while reducing the associated costs. This can be done by attracting more customers through better advertisements and an increase in the quality of services.