Guillermo_Furniture_Store

Guillermo Furniture Store ACC/561 Intro Managerial decision-making basis is a correlation of cost relationships, control systems, and financial analysis. The use of financial reports such as income statements, budgets, and past financial data is used to calculate current profitability in addition to formulating future strategic plans. The use of the above stated techniques will be used to assess Guillermo Furniture Store’s current profitability and the possible future outcomes. Cost Relationship Behaviors Decision-making and management are not separate functions. Decision-making is tied with the other functions, such as Coordinating, Planning, and Controlling (Horngren, 2008). It is important for Guillermo to use his budgets and performance reports when decision making. A good example would be that if he has a critical decision to make about which avenue he should take to obtain the best results. When examining the budget both past and present, Guillermo can make decisions based on solid information obtained by this data The most important areas of decision making that must be discussed is how the cost behaviors at Guillermo can affect the decision making strategies of the managers. These cost relationships and behaviors can affect manager’s decisions in a many ways. Cost behaviors are an important way of describing the changes and receptiveness that costs have in relation to changes in production and sales. In order for a company to look at this data it must make sure to have a relevant range of which you can compare changes within the sales and production numbers. These relationships have a wealth of knowledge and valuable information that help a business better understand its operations, and can also help with determining Cost Volume Profit (CVP) relationships. They can also help with budgets, forecasting, and product differentiation/effectiveness (Horngren, 2008). One of the biggest parts of cost behavior and relationship analysis is how Guillermo chooses to allocate costs. The easier it is to trace and allocate a cost, the better it is for an accountant to do their job. Accounts allocate costs in four main groups: service departments, producing departments, products and services, and customers. Once costs have been allocated into the proper groups, the managers can begin to watch and see cost relationships, and how they behave in each of their departments and for many different circumstances (Horngren, 2008). Control Systems According to Horngren, A management control system is an integration of techniques for gathering and using information to make planning and control decisions, for motivating employee behavior, and for evaluating performance. Managers must identify responsibility centers, develop performance measures, establish a monitoring and reporting structure, weigh costs and benefits, and provide motivation to achieve goal congruence and managerial effort (Horngren, 2008). The management control system should be centered on Guillermo’s business goals. This would reflect Guillermo’s long term and short term goals. The most vital Management Control System that Guillermo must use to help achieve it’s organizational goals are Measure, Monitor and Report. Measurability is vital in control systems, because financial and non-financial goals have to be measured in order to be effectively managed. This will help to look at exactly what we are achieving and if we are improving. Monitoring is a way of consititinently looking at what it is that needs to be improved and Reporting is when the company compiles and reviews the information that is needed. This control system will ensure higher quality. As this company grows, the management control system must grow and change in an evolutionary process. Introduction to Management Accounting summarizes a list of management control principles that will always be important: 1. Always expect that individuals will be pulled in the direction of their own self-interest. 2. Design incentives so that individuals who pursue their own self-interest also achieve the organization’s objectives. 3. Evaluate actual performance based on expected or planned performance, revised, if possible, for actual output achieved. 4. Consider non-financial performance to be an important determinant of long-term success. 5. Array performance measures across the entire value chain of the company. 6. Periodically review the success of the management control system. Is the organization achieving its overall goals' 7. Learn from the management control successes (and failures) of competitors around the world (Horngren, 2008). Current Situation Analysis In Analyzing Guillermo’s current manufacturing situation, three factors will be discussed: return on investment, residual income and the economic added value. To calculate the return on investment, the net earnings (after taxes) are divided by the investment capital. The net income according to the income statement is $26,748. The investment capital is calculated by deducting the current liabilities ($176,781) from the total assets ($1,354,141) to equal ($1,177,360). Determining Guillermo’s return on investment can be calculated by dividing the net income of $26,748 by the investment capital of $1,177,360 to equal 2.27%. The current return on investment of 2.27% for Guillermo’s current situation is not generating a significant profit. Guillermo will need to increase sales in order to reach a more profitable break-even point, resulting in higher profits. The economic value added or economic profit is calculated by “after-tax operating income less a capital charge” (Horgren, 2008). The capital charge is known as the weighted average cost of capital (WACC), which for Guillermo would include his interest paid on the building. With a 7% WACC of the total after tax operating income of $1,177,360, the WACC equals $82,415. Thus, when subtracting the WACC of $82,415 from the net assets of $26,748, Guillermo shows a negative economic added value of $55,667. The residual income is known as the “after-tax operating income” (Horngren, 2008). Guillermo’s residual income is calculating a negative rate, showing that the current manufacturing techniques are not profitable. Conclusion Many accounting functions are used to manage performace goals and trends. Guillermo must use budgets and performance reports in the decision making process for strategic planning. Cost relationships and managers behaviors play a significant role in the organizations success. The cost behaviors show the changes and receptivness that cost has on both service and production. Management control systems also help to intergrate techniques for the use of planning, motivating employees and performance evaluation. Cost behaviors and mangement control systems will be beneficial for Guillermo to have effective business relationships and cost effective production strategies. Guillermo can also use financial data and formulas to determine the company’s profitability. The use of break even point shows Guillermo at what point of sales is the cost of production transferring into a profit. Analyzing the return on ivestment shows how much money Guillermo is profiting after the investments are paid. Guillermo also must consider the economic added value. After careful analysis of Guillermos financial data using accounting formulas, it is shown that the current production does not result in a siginifant profit. Guillermo must consider a more cost efficient method of production.