Guillermo_Furniture_Store_Flex_Budget

Running head: GUILLERMO FURNITURE STORE ANALYSIS Guillermo Furniture Store Analysis Guillermo Furniture Store Analysis This analysis of Guillermo Furniture Store includes a revised flexible budget. The analysis discusses risks associated with sales forecasts, an analysis of ethical considerations in the preparation, and subsequent use of the budget. In addition, considerations were made regarding how the organization’s code of ethics requires an ethics analysis for performance management tools. Revised Flex Budget [pic] Risks Associated with Sales Forecasts The current sales forecast illustrates growth in both Mid-Grade and High-End product lines. Analysis of actual performance and market trends identify risks associated with these predictions. Forecasts for Mid-Grade products have shown a variance in favor of actual performance versus forecast of 594 units. The opposite holds true for the High-End product lines, which Guillermo is hinging future growth on, has a variance of -318 units at June year-to-date (YTD) (see table A). [pic] Despite a combined positive variance at June YTD for units produced, the net earnings indicate a loss of $45,762. The sale of High-End products has tapered over the last six months thereby negatively affecting the profit margin because it is mostly influenced by the High-End line. This emphasizes the risks associated with sales forecasting as various factors makes it difficult to correctly predicting future sales. Ethical Considerations in Preparation of the Budget Sometimes managers choose unethical options in the preparation and use of the budget. Some managers create biased budgets to increase the resources allocated to their department to reach output targets and create higher rewards for themselves. Managers also create biased budgets when budget targets directly affect performance evaluations. Managers participate in budget padding in which they overstate the budget costs and understate budget revenues to create a more achievable profit level. This also protects managers against budget cuts when costs increase or revenue falls. The main concern is that the budget and evaluation processes cause employees to provide biased information and make questionable decisions causing a lack of trust throughout the organization. Managers can avoid this behavior by taking personal responsibility, rewarding good budget forecasts as well as rewarding good performance against the budget. Use of the Budget The budget submitted to the store manager will produce the evidence needed to make important upcoming business decisions. Given the challenges that Guillermo has faced during the 1990s, where a foreign competitor and a large national retailer emerged. “The most important functions of the budget are planning, performance evaluation, and communication” (Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2008). In short, with the challenges the Guillermo Furniture Store faces, planning will be fundamental in its pursuit to return as a leader within the industry. Once a financial plan is developed, a system must monitor the impact of plan of action, in which the performance evaluation step is integrated. Communication is the step that links the use of the budget the operational part of the business. The budget helps managers to plan and coordinate activities of the company. Code of Ethics To stay competitive and avoid conflict of self-financial interest, Guillermo Furniture Store will have to adopt a code of ethics for their financial functions and performance tools. Another consideration is the audit type and level of enforcement for employees and performance tool to ensure the integrity and credibility of the company. “Even before the Enron and other corporate scandals, over 80% of U.S. companies had a code of conduct, according to the survey by the Financial Executives Institute. But the codes differed in type and in level of enforcement” (Horngen, et al., 2008). Many companies have applied the code of ethics in corporate image and employee morale but not in performance tools. Without the ethics analysis on performance tools, a company can lose ethical decision-making processes, accurate accountability, and business stability. Conclusion A flexible budget projects revenue and cost for various activity levels and is a very important tool for a store manager at Guillermo Furniture Store to use to plan for financial success. Sales forecasting is inherently risky and is one of the disadvantages of applying a budget because of the difficulties of predicting in a constantly changing business world. In using budgets, the company should encourage ethical behavior through strong code of ethics principles. References Horngren, C., Sundem, G., Stratton, W., Burgstahler, D., & Schatzberg, J. (2008). Introduction to management accounting (14th ed.). New Jersey: Pearson-Prentice Hall. University of Phoenix (2010). Guillermo Furniture Store Scenario. Retrieved on April 10, 2010, from University of Phoenix, Week One, ACC/561–Accounting Course Web site.