Guillermo_Furniture_Store_Analysis

Guillermo Furniture Store Analysis Sales forecasting is a complex undertaking in the business environment. The sales budget depends entirely on the forecast to predict sales under a given set of conditions (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2008). To be accurate a sales forecast should consider several factors including current industry trends, technological advancement, previous market share, and general economic conditions (Weygandt, Kieso, & Kimmel, 2005). A flexible budget shows the revenue and cost to expect at different levels of activity. Appendix A shows that Guillermo furniture store will be most profitable when sales is at 2,500 for the mid-grade and 400 for high-end furniture. Using the sales forecast to determine the amount of raw materials to purchase and the amount of finished product to make entail possibilities of errors and risks in making management accounting decisions. An under forecast results when the store does not produce enough furniture to meet demands. The outcome is a loss in sales and possible loss of customers. An over forecast often results in an excess purchase of raw materials and production of finished product. An excess in raw materials will tie up capital and an excess in finished product will take up costly warehousing space. An under forecast may result not possessing enough staff to meet demands. As a consequence, employees become overloaded, have to work overtime and service level deteriorates. This drives costs up and the quality of the finished product decreases. In contrast, an over forecast results in underutilization of employees and other resources (Worth, 2010). In the business world today ethics is a key to becoming a trustworthy and profitable company. With collapses such as Enron and WorldCom fresh on the investors mind ethics is the key to having a successful capital raising campaign. It is for this reason that chief executive officers (CEO’s) and chief financial officers (CFO’s) signatures is mandatory on the company’s financial documents. This ensures that these key position holders are aware of and take responsibility for the content of these documents. For Guillermo Furniture it is important to implement and maintain a strong code of ethics. The company should implement a code that becomes part of the culture. A code of ethics should affect how every employee interacts with each other, suppliers, customers, and any other contacts. Increase incentives and salaries lure managers to make unethical decisions such as budget padding where figures are either under or over inflated to achieve projected goals. Attaining budget goals as a prerequisite to employee’s performance evaluation also influence unethical behavior in the workforce. These practices will adversely affect future business relations with current and potential customers. For example, Walgreens has implemented a four way test in its culture that provides an easy set of questions to decide if an action is ethical or not. The four way test states: 1. Is it the truth' 2. Is it fair to all concerned' 3. Will it build goodwill and better friendship' 4. Will it be beneficial to all concerned' (Walgreens, 2010) By using this tool anyone within the company can quickly determine how to proceed with any situation. When creating a budget it will be important for the company to employ the four way test. The first test should be is the budget the truth' This means if the budget is practical and achievable. Managers do not want to be overstating assets, sales, or production numbers to help with the bottom-line. Managers must also not understate liabilities. This will only cause the manager and the company to appear bad when the budget is not met. Next the manager should consider is it fair to all concerned. This would include the customer, employees, and stakeholders. The customer should be receiving a product of high quality and meets the agreed upon specifications. Are the employees receiving a fair wage for the work been done' To ensure the stakeholders are receiving a fair situation tight cost controls should be in place to ensure little waste or abuse of company resources. Managers should look to ensure the budget does not allow any portion of the company an unfair portion of operation moneys to avoid tensions in the production process. To meet the last two tests the budget should provide for expected expenses and can meet the operational goals of the company. Guillermo Furniture is poised to have a strong year and make an economic profit. The company’s ability to create and implement flexible budgets that accurately and ethically depicts targeted goals ensures efficient utilization of resources and sales projections during the process. It enables the company to make the necessary adjustments that will maximize future profitability. Appendix A Guillermo Furniture Store Activity Based Flexible Budget For the Month Ending June 30, 2010 BUDGET FORMULA Units Sales in units Mid-Grade 2,500 2,585 2,670 High-End 400 517 634 Sales in dollars per unit Mid-Grade $509.00 $1,272,500.00 $1,315,765.00 $1,359,030.00 High-End 879.00 351,600.00 454,443.00 557,286.00 Total Sales $1,624,100.00 $1,770,208.00 $1,916,316.00 ACTIVITY Production Cost Driver: Number of Labor Hours/Unit Cost-driver level Mid-grade 20.00 21.50 23.00 High-end 28.00 30.00 32.00 Direct labor ($/HR)/Unit $ 15.00 Total labor cost Mid-grade $ 750,000.00 $ 833,662.50 $ 921,150.00 High-end 168,000.00 232,650.00 304,320.00 Total cost of labor $ 918,000.00 $1,066,312.50 $1,225,470.00 Cost Driver: Number of Units Cost-driver level Mid-grade 2,500 2,585 2,670 High-end 400 517 634 Direct Materials ($)/Unit Mid-grade $ 140.00 $ 350,000.00 $ 361,900.00 $ 373,800.00 High-end 250.00 100,000.00 129,250.00 158,500.00 Total cost of materials $ 450,000.00 $ 491,150.00 $ 532,300.00 Administration/Plant Overhead Salaries $ 50,000.00 Utilities 9,000.00 Benefits 10% 5,000.00 Insurance 3,000.00 Property Taxes 975.00 Depreciation 50,000.00 Supplies 6,000.00 Total Fixed Cost $ 123,975.00 123,975.00 123,975.00 Income Tax Expense 42.00% 38,864.70 21,624.33 9,906.96 Total costs $1,531,565.00 1,718,721.50 1,892,728.00 Operating income $ 92,535.00 51,486.50 23,588.00 References Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to management accounting (14th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. University of Phoenix. (2010). Guillermo Furniture Scenario. Retrieved November 16, 2010, from University of Phoenix, Week One, rEsource. ACC561R3—Economics Web site. Weygandt, J., Kieso, D., Kimmel, P., (2005). Managerial Accounting Tools for Business Decision Making. : John Wiley & Sons, Inc. Walgreens. (2010). Mission Statement. Retrieved from Internal Website Worth, Maggie, 2010. The Risks of Sales Forecasting. Retrieved December 13, 2010 from: eHow.com http://www.ehow.com/list_6507308_risks-sales-forecasting.html#ixzz182olW6lv