Guillermo_Furniture_Analysis

Introduction In the Guillermo Furniture Store Scenario, Guillermo, the owner of a local furniture manufacturing business, in Sonora, Mexico, saw the impact of a local economy growing, overseas competitors, and modern technology producing the same quality furniture while maintaining inexpensive prices. This paper will analyze the risks associated with sales forecasts and the Ethical considerations in the preparation and subsequent use of the budget. This paper will also discuss how ethics might influence his accounting decisions. Risks Associated with Sales Forecasts The sales forecast is a prediction of a business's unit and dollars sales for some future period of time, up to several years or more. These forecasts are generally based primarily on recent sales trends, competitive developments, and economic trends in the industry, region, and/or nation in which the organization conducts business. Sales forecasting is management's primary tool for predicting the volume of attainable sales. Therefore, the whole budget process hinges on an accurate, timely sales forecast. Sales forecasts are conditional in that a company prepares the forecast prior to developing strategic and tactical plans. The forecast of sales potential may cause management to adjust some of its assumptions about production and marketing if the forecast indicates that: 1) Current production capacity is inadequate or excessive. 2) Sales and marketing efforts need revisions. Management, therefore, has the opportunity to examine a series of alternate plans that propose changes in resource commitments (such as plant capacity, promotional programs, and market activities), changes in prices and/or changes in production scheduling. Although sales forecasts may accurately project significant changes in market conditions, a company needs to thoroughly examine its own resources to determine its ability to respond to these changes. Analysis of Ethical Considerations in the Preparation and Subsequent use of the Budget When preparing and creating a budget, certain implications apply to all employees with regard to following an ethical course of action. Every employee in each department needs to understand what is involved with using a budget and how this budget can reflect on the corporation and agreement of all employees, that the budget does not include any misappropriation of budget data. This misappropriation is a risk that creates unique incentives for departments and individuals who pay a budget to provide for additional resources when these resources may not be needed. Not only do these incentives cost a company more money and “lead managers to make poor decisions, they undercut attempts to maintain high ethical standards”. Horngren, C. (2008). Maintaining a high standard of ethics not only produces a fair, unbiased budget but strengthens the communication between department managers and reinforces company objectives. Sales Forecast for July | | | | | July | High-End | 430 Units | Mid-Grade | 2,870 Units | | Units Budgeted | $ Budgeted | Revenue | | | High-End | 430 | 377,970 | Mid-Grade | 2,870 | 1,460,830 | Total Revenue | | 1,838,800 | | | | Cost of Goods | | | High-End | | 107,500 | Mid-Grade | | 401,800 | Total Cost of Goods | | 509,300 | | |   | Net Revenue | | 1,329,500 | | | | Labor Wages | | 1,054,500 | Office Salaries | | 50,000 | Benefits | | 107,000 | Supplies | | 6,000 | Utilities | | 9,000 | Insurance | | 3,000 | Property Taxes | | 975 | Total Operating Expense | | 1,230,475 | | | | Earnings before Taxes & Depr. | | 99,025 | Depreciation | | 50,000 | Earnings before Taxes | | 49,025 | | | | Income Taxes | 42% | 20,590 | | | | Net Earnings | | 28,435 | Conclusion Errors in forecasting can affect a company's financial health. The discussed cost aspects of storage of excess materials, loss of sales and customer and employee dissatisfaction are just a start. Companies often allocate capital, disperse profit funds and borrow capital based on the sales forecast. If sales are under forecast, the business may not have enough capital reserve to make initial expenditures needed to gain the additional business. Ethical integrity is essential to ensure that the budget establishes realistic forecasts and accurate reporting of the scheduled activities so that the true picture of the company financial health is depicted. References University of Phoenix. (2011). Guillermo furniture budget. Retrieved from University of Phoenix, ACC/561. University of Phoenix. (2011). Guillermo furniture scenario. Retrieved from University of Phoenix, ACC/561. Horngren, Charles T. (2008). Introduction to Management Accounting. ACC/561, University of Phoenix, AZ. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx Worth, M. (2010). The Risks of Sales Forecasting. Retrieved from http://www.ehow.com/list_6507308_risks-sales-forecasting.html