Guillermo_Furniture

Guillermo Navallez is a resident of Sonar, Mexico and owns and operates a successful furniture manufacturing company. Guillermo enjoyed much success until the 1990’s when competitors began to enter the market and take business away from him. After conducting his own research of the problem, Guillermo determined he had three alternatives: apply the same high-tech methods as his competitor, become a representative for another manufacturer, or create a furniture coating that differentiates itself from other coatings. Throughout this paper we will discuss how Guillermo can use budgets and performance reports to make his decision, how ethics can influence his accounting decision, and what information is most relevant to him. How budgets and performance reports can facilitate decision making According to Charles Horngren, “a budget is a quantitative expression of a plan of action” (Horngren, 2008, pg. 13). Guillermo, by drafting a budget, can use it to make his decision making process easier. Budgets have many redeeming qualities and objectives that would be useful to Guillermo. First and foremost is a budget promotes planning. Budgets formulate expected performance and they replicate company objectives. Budgets force managers to plan for the future and help prepare them for problems that are not foreseen. After reviewing Guillermo’s budget for his company it appears there are several unfavorable variances where actual costs were greater than budgeted costs. With better planning, Guillermo may have been able to avoid some of this. The forced planning is by far the greatest contribution of budgeting to management. Once a budget is created, Guillermo should begin using performance reports to his advantage. “Performance reports provide feedback by comparing results with plans and by highlighting variances” (Horngren, 2008, pg. 13). Guillermo can determine actual results through favorable or unfavorable variances. Looking back at Guillermo’s budget for the month of June it is obvious that there are many unfavorable variances in areas such as revenue and net earnings compared to the budget. In my opinion after reviewing Guillermo’s budget and performance report, the biggest problem area besides office labor is the cost of goods for mid-grade products. The cost for this is too high and may be a possible area for Guillermo to focus on remedying. Insight such as this will allow Guillermo to pinpoint problem areas and focus his planning around them. It is because budgets aid in planning and performance reports aid in control that managers can use them as tools in decision making processes. Ethics influence accounting decisions Ethics play a big role in all business decisions made and accounting is no exception. In fact employees who make accounting decisions are probably faced with more opportunities to be unethical than other business areas. In accounting it is easy for someone to misrepresent numbers in order to make them look better to investors. Because of this there have been many laws put into place in hopes to prevent the temptation of making unethical accounting decisions, one of the more recent ones being the Sarbanes-Oxley Act of 2002. However in the end ethics are a personal choice. Every accountant, businessman, and person will be faced with a situation where they will have to make a choice based on ethics. According to Shawn Chambers when it comes to accountants and ethics, “at all times, accountants must perform to the best of their ability and act in a professional manner” (Chambers, 2010, para. 5). What accounting information is most relevant' In Guillermo’s situation I believe the most relevant accounting information is net income he could earn for each of his three alternatives solutions he came up with. However he will also need to be aware of any additional cost of capital with these alternatives. Guillermo has to realize that with the high-tech option his cost of equipment and maintaining it will go up but his office labor will go down. He needs to analyze these situations carefully to determine which is best. In the end, Guillermo will need to see that the additional income is more than the cost of capital if he is going to fund the additional investment and be successful. References Chambers, S. (2010, June 7). eHow. Retrieved September 11, 2010, from Ethics Issues in Accounting: http://www.ehow.com/list_6597232_ethics-issues-accounting.htm Horgren, C. (2008). Introduction to Management Accounting. New York: Prentice Hall Inc. ----------------------- 1