Flexible_Budget

Guillermo Furniture Store is threatened by both foreign and local competition. Local competition is merging to become larger and there is new and more advanced technology being used by large foreign companies that is the cause of Guillermo losing profit and income. Guillermo Furniture has to look at the budget more closely and make modifications to the current flex budget. A flexible budget, also known as a variable budget is a budget that adjusts to different levels of activity. Flexible budgets summarize what results to expect for different levels of activity. Variances are differences between expected (or planned) results and actual results. In this case we are examining the flexible budget because it predicts the revenues, costs, and profits at any different volume of products. Budgeting itself is a very risky process because of the many uncertainties that exist. For example, in looking at sales, there is a big risk involved as the market might fluctuate or the condition of the economy might change. These changes can cause the products sales and cost drivers go up or down. There are many unforeseen events that could happen which would have an effect on Guillermo sales forecasts and budgets. An example of this would be an earthquake which would cause damage to the facility and inventory. There is another factor involved in budgeting that has to do with ethics. There has to be a solid corporate governance so managers practice good ethics and judgment and do not try to plug the budget one way or another. One way to address this issue is to make sure make sure the bonuses of managers is not linked directly to the budget performance. If these issues are addressed to make sure there is no bias in the flex budgeting, it a powerful tool to predict future revenue and costs for the company.