Guillermo_-_Wee_6_Assignment_-

Guillermo Furniture Store Paper The majority of companies today are facing the same challenges as Guillermo Furniture Store. Guillermo examined the impact of an expanding local economy and observed opponents and current equipment manufacturing the identical furniture while sustaining economical costs (University of Phoenix, Guillermo Furniture Store Scenario, 2010). Enhancements in robotics and machinery, alongside decreasing costs and higher production standards have generated a progressively more competitive furniture market throughout the world. Guillermo Furniture should use budget and performance reports to evaluate and collect useful data to determine what accounting information is more relevant to consider for Guillermo Furniture Store moving forward into the future. Guillermo Furniture Store must also weigh in on ethical account decisions moving forward into the future. Cost Relationships and Behaviors Decision-making is a daily affair that managers must make and managers at Guillermo Furniture Store must make business decisions about cost relationships and behaviors. An important area to discuss at Guillermo Furniture Store is how cost behaviors can influence the decision-making sanctions and policies of managers. These cost relationships and behaviors can shape managers assessments and choices in diverse ways. Cost behaviors are a way of describing the changes and accessibility that costs contain in relation to changes in production and sales (Action Plan Marketing, 2010). Variation in production and sales is evaluated when there is an alteration in activity. These relationships have an affluence of information that aid a business to comprehend better its procedures and can also assist with determining CVP (cost volume profit) relationships (Action Plan Marketing, 2010). How Guillermo chooses to allocate costs is a huge element of cost behavior and relationship analysis. Recognizing how a cost responds to a change in the level of activity makes it effortless to produce a budget, organize a forecast, and decide how much profit a new product will generate (Horngren, Sundem, & Stratton, 2008). The more distinguishable and distributable a cost is, the more superior when time approaches for accountants to perform their jobs. “Costs are primarily allocated into four groups, service departments, producing departments, products and services, and customers, as well as being broken down into direct and indirect costs” (Horngren, Sundem, & Stratton, 2008, p. 392). Managers can begin to observe the cost relationships and how they behave in each of their departments or situations once costs have been allocated. Therefore, managers must keep track of the costs of products and services. In addition to the above, Guillermo Furniture must monitor their service and producing departments; particularly because they can add to the costs of the products and services. It is imperative to ensure that consumer profitability and costs are being scrutinized. Managers will then be able to establish the cost drivers after monitoring the company costs over a period. Another important aspect for Guillermo Furniture Store is to encompass a management control system. A management control system is used for “gathering and using information to make planning and control decisions, for motivating employee behavior, and evaluating performance” (Horngren, Sundem & Stratton, 2008, p. 386). This system defines and communicates Guillermo’s goals, ensures that the managers understands what it takes to attain those goals communicates results to employees, and motivates the managers and employees to achieve those goals. Understanding and evaluating budget decisions to pursue new investments or machinery is beneficial to any organization. Incremental analysis is one way that Guillermo can improve his decision-making skills Budget and Performance Reports have the potential to be used by Guillermo in a variety of ways. First, budgets represent valuable information. Using the information acquired from the budget reports, Guillermo could make better business decisions based on the inflow and outflow of monies. Monitoring a budget throughout a fiscal year to ensure compliance would enable Guillermo to forecast and predict, what expenditure if any, the company could take to increase profits, productions, or sales. Control Systems to Achieve Organizational Goals Managers should follow the management control system after it is implemented and continuously adapt all the essentials and revise as needed. The management control system is based on Guillermo’s business goals. Goals are measured, monitored and reported and managers adapt and revise to the changes as needed. Because of high competition, Guillermo decides to opt for the distribution-method. Without the addition building and high-tech equipment, the furniture store sees a larger profit and higher contribution margin. 1. What control system might Guillermo use to help it achieve his store’s organizational goals' - Chad Break-Even Analysis 2. Provide a break-even analysis on the current situation considering the possible effects of selling the flame retardant separately. This must be presented in at least one table. - Stephanie Return on Investment, Residual Income, and Economic Value Added Guillermo has two divisions, Traditional furniture and specialty fire retardant furniture. Traditional and specialty divisions each have an operating income of $200,000 and $150,000 respectively. To say that Traditional division with an operating income of $200,000 has better performance than Specialty division, with an operating income of $150,000, ignores an important aspect of profitability. A better test of profitability is the rate of return on investment (ROI), which is income (or profit) divided by the investment required to obtain that income or profit. If traditional division requires an investment of $500,000 and specialty division requires only $250,000, specialty division has the higher ROI: Although use of ROI causes Guillermo to consider both income and investment in their decisions, using ROI may cause managers, especially those in profitable units, to reject profitable investment opportunities. This led to the development of alternative performance measures—metrics that focus more on economic profit. Metric emphasizes on an absolute amount of income rather than a percentage. Economic profit, also called residual income, defined as after-tax operating income less a capital charge, is such a metric. The capital charge is the company’s cost of capital multiplied by the amount of investment, where the cost of capital is what the firm must pay to acquire more capital—whether or not it actually has to immediately acquire more capital. Economic profit tells Guillermo’s manager about how much Guillermo’s after-tax operating income exceeds what it is paying for capital (Horngren, Sundem, & Stratton, 2008). Guillermo’s Traditional division’s after-tax operating income is $200,000, the average invested capital in the division for the year is $500,000, and the company’s after-tax cost of capital is 8%: Conclusion - Chad References Action Plan Marketing. (2010). The Risks of Not Producing a Sales Forecast. Retrieved from http://www.bettersalesforecasting.com/sales-forecasting-the-key-to-business-success Horngren, C. T., Sundem, G. L., & Stratton. 2008. Introduction to Management Accounting (14th Ed.). Saddle Brook, New Jersey; Prentice Hall. Rankin, F.W., Schwartz, S.T., & Young, R.A. (2008, July). The Effect of Honesty and Superior Authority on Budget Proposals. Accounting Review, 83(4), 1083-1099. United States Department of Labor. (2009). Occupational Outlook Handbook. Retrieved from http://www.bls.gov/oco/ocos003.htm University of Phoenix, (2010). Guillermo Furniture Store Scenario. Retrieved on November 8, 2010 from http://www.ecampus.phoenix.edu