Guillermo_Budget_Process

Guillermo’s Budget Process ACC/561 April 21, 2011 Ciro Immordino Mr. Guillermo had everything he wanted, a thriving home and business in the sleepy community of Sonora Mexico, and he was the owner of Guillermo Furniture Store. Guillermo was a large furniture manufacturer who took advantage of a good supply of cheap labor and timber within his community. Unfortunately, by 1992 his business began to suffer due to situations outside of his control and Mr. Guillermo has watched his profit margins shrink, costs continue to rise, and losing customers to his competition (Guillermo Scenario, University of Phoenix, 2011). The future of Mr. Guillermo’s business could be determined by the financial decisions he makes today. New competitors offer new technology and lower prices to customers, which could result in a significant change for Guillermo’s company. Guillermo’s management team must look at the current cost relationships and behaviors within Guillermo’s Furniture Store to determine the best way for the company to move forward. The decisions Guillermo make They must work together to determine alternative financial decisions and select the alternatives that best suit the company. A break-even analysis on the new product and current patented product will help the company make that decision. Guillermo will also be able to figure return on investment, economic value, and residual income in the decision making process. Guillermo’s Managers must look at more than the traditional relationship of costs in the production of their furniture. The Managers must look at each activity required to produce a piece of furniture, known as an activity-based view of cost behavior, also consider the traditional relationship of material costs related to the production of the furniture, as well as the costs of manufacturing on a day to day basis (such fixed costs as rent, electricity and labor). To do this effectively they must identify cost drivers, outputs of resources or outputs of activities that require the use of resources and thereby cause costs to be incurred (Horngren, Sunderm, Stratton, Burgstahler, & Schatzberg, 2008, p. 48 and 386). Cost Relationships and Behaviors Guillermo’s managers must clearly define the company goals, mission statement, objectives, and establish a climate of success within their organization. This would include clearly defining goals on furniture quality, standards, output, and clearly defined timelines. Control systems will help communicate company goals within the organization providing motivation to employees, incentives to succeed, and a clear mission statement. By establishing clear performance indicators all levels of the company will know how to achieve their set goals. Employees must understand and develop a positive growth culture within the organization. One example of a clear goal would be the number of chairs they will produce each month. Managers can set their team goals and have weekly staff meetings to monitor production and cover any issues that could prevent them from reaching their goal. By maintaining communication, ethical, moral, and production standards, Guillermo will establish a firm foundation for success. Managers should incorporate Guillermo’s long and short term goals into their performance standards and ensure everyone understands them. Control System Once initial goals and standards are established designing a control system is critical for achieving the organizational goals. Establishing management controls and performance measures ensure there are standards to measure success and provides a tool for managers to motivate employees. Management controls also provide a means of gathering information necessary to make informed decisions on control and management issues. Guillermo Managers will set goals and objectives and develop related performance measures for their section of the business. Mr. Guillermo will establish organization-wide goals, performance measures, and targets, which will be reviewed annually. These goals will provide a long-term framework around which the organization will form its comprehensive plan for re-positioning itself in the market (Horngren, et al, 2008, p. 388). One approach to selecting the specific actions and measures is for top managers to identify key success factors which are characteristics or attributes that managers must achieve in order to drive the organization toward its goals (Horngren, et al, 2008, p 388). A good example would be timeliness of product delivery, customer service and employee responsibility. It is critical to establish responsibility centers which then establish specific goals and actions the management control system will monitor (Horngren, et al, 2008, p 389). Guillermo will establish viable cost centers, one will be responsible for monitoring manufacturing costs and another will monitor resource and material costs. A profit center will also be established to control revenues and expenses. Caution must be emphasized to ensure managers do not focus all their attention on the financial aspects of the performance measures but rather a balance between both financial and non-financial measures in order to prevent possible problems. For example, failing to measure process improvements or problems within the process would be detrimental to Guillermo’s long term goals. Managers should consider measuring processes that will enhance profits not just the revenues received from furniture sales. Finally, Guillermo Managers must continuously weigh the cost and benefit of product lines and processes and continue to evaluate alternatives based on the needs of the company. Short term success is not a sure sign of long term benefits to the company. With a solid base of control systems and motivated managers are on the right path. Another essential piece of the economic puzzle will be to analyze the fixed and variable costs involved in manufacturing the furniture and day-to-day operations of the business. Currently Guillermo’s fixed costs may include salaries of his employees, insurance, taxes, utilities and rent unless he owns his property. Guillermo’s fixed costs for June are $1,182,940 and do not change regardless of the number of products manufactured. Variable costs are those costs that change based upon how much product is produced and varies for product type. Management can look at the variable cost of each product based on the production cost of each product. |Direct Cost/Unit |Current | Hi-Tech | Broker | | Mid-Grade | 440.00| 300.00 | 360.00 | | High-End | 700.00 | 410.00 | 410.00 | Total: 1,140.00 710.00 770.00 Break-Even Analysis Whether or not Guillermo decides to introduce his new flame retardant product to the market place is one that must be made on logic and not greed. The decision requires careful consideration of more than just profit. For example, what costs would be incurred during the production process' What is the cost of applying the product' Are there any harmful reactions to consumers' What would possible liability issues entail' These questions are just an example of how complex some business decisions can become. By conducting a thorough break-even analysis Mr. Guillermo can decide if the break-even point based on an analysis of fixed costs, selling price, and variable costs. if it is more cost effective to add the retardant to the manufacturing process or sell it as a separate product. The decision to sell the retardant as a separate product will inspire even more questions that need answers in order to ensure its profitability. Is it cost effective to pay the cost of marketing and selling the product' Mr. Guillermo would need to develop a relevant pride for his product and range of costs to make it, prior to making a final decision. Determining the relevant range would allow Mr. Guillermo to decide if the cost is worth the effort to sell the product. For example, if the cost to produce the flame retardant product increases variable costs by $400, is the cost for the flame retardant product worth the expense. (add - break-even analysis worksheet) • Recommendation based on return on investment, residual income, and economic value added for current situation. References Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D. & Schatzberg, J. (2008). Introduction to Management Accounting (14th ed). NJ:Pearson-Prentice Hall University of Phoenix. (2011). Week One supplement: Guillermo Furniture Scenario. Retrieved from University of Phoenix, ACC/561—Accounting course website. University of Phoenix. (2011). Week One supplement: Guillermo Furniture Budget. Retrieved from University of Phoenix, ACC/561—Accounting course website.