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Guillermo Furniture Flex Budget

Guillermo Furniture Store Analysis

Guillermo Furniture Store Analysis
Many risks are involved when forecasting and preparing an organizational budget. Guillermo Navallez, proprietor of The Guillermo Furniture Store, is aware that to compete with the new and larger furniture retailers, he will have to make some changes to the way he does business. This will involve readjusting his current and future budget. The following will discuss the suggested revisions to Guillermo??™s flex budget along with the risks associated with sales forecasts and analysis of ethical considerations in the preparation and subsequent use of the budget, consideration to the organization??™s code of ethics, which requires ethics analysis for the suggested performance tools.
Risks Associated with Sales Forecasts
When management is willing to partake in the changes and employees witness the participation and ownership to the plans of the organization, it provides better success of the company. If Guillermo and his management team do not use the budget effectively, he risks the chance of others in the organization to view the budget ???as irrelevant. Even with the support of top management, however, budgets, and the managers who implement them, can run into opposition. One way to reduce these negative attitudes, and simultaneously improve the quality of planning decisions, is to ensure that managers at all levels participate in setting budgets??? (Horngren). Guillermo??™s flex budget shows the difference in income that would be associated with adding 100 of the mid-grade units versus 100 of the high end units. The high end units increase the income more but the managers must make sure that the market demand is such that they will be able to sell the additional units.

| | | | |
|Production Quantity | | | |
| Mid-Grade |1300 |1300 |1400 |
| High-End |300 |400 |300 |
|Sales | | | |
| Mid-Grade |397,800 |397,800 |428,400 |
| High-End |143,100 |190,800 |143,100 |
|Total Sales |540,900 |588,600 |571,500 |
|Less Returns and allowances | | | |
| |(16,227) |(17658) |(17145) |
|Net Sales |524,673 |570,942 |554,355 |
|Direct Costs M&L | | | |
| Mid-Grade |284,583 |284,583 |306,474 |
| High-End |89,511 |119,348 |89,511 |
|Indirect Costs | | | |
| Factory Overhead |47,966 |47,966 |47,966 |
| Freight Out |18,932 |20,601 |20,003 |
|Total Cost of Goods Sold |442,792 |474,298 |465,754 |
|Gross Profit |81,882 |96,644 |88,602 |
|Selling Expenses |9,439 |9,671 |9,588 |
| Operating Profits |72,442 |86,973 |79,014 |
| Interest Expenses |5,960 |5,960 |5,960 |
|Earnings Before Taxes |72,442 |81,013 |73,054 |
| Income Taxes |27,922 |34,026 |30,683 |
|Net Profit (Loss) |38,560 |46,988 |42,371 |
| Net Profit Margin |7.35% |8.23% |7.64% |
| | | | |
Source: Guillermo Furniture Store Scenario
Analysis of Ethical Considerations
There are several ethical considerations that a manager in Guillermos position must take into account. Without these considerations, problems can occur when attempting to implement a budget. According to Horngren et al. (2008), ???top-level management can easily influence how lower-level managers react to a budget.??? Budgets are effective when employees at different levels throughout the organization are able to participate in the process of creating the budget. Also, top-level managers have to keep in mind that when budgets are misused, employees are encouraged to lie and cheat, which leads to biased information going into the budget (Horngren et al., 2008). This type of lying and cheating sets the course for low ethical standards within the organization. Top-level managers goal within a company should be to incorporate values of high integrity, which is essential to the long-term success of the company. Including lower-level managers throughout the company in the process of budgeting will help to alleviate the possibility of incorporating low ethical standards and reinforce high ethics instead.
Code of Ethics Analysis for Performance Tools
As things change in Guillermo??™s Furniture store processes and systems will also change. If Guillermo begins to grow, incorporate with a larger company or take on new businesses he will be working with new processes. Guillermo will have to trust others with his finances and accounting as the business grows these new changes are going to require ethically sound employees Guillermo is going to have to find and analyze new employees and trust them with his financial future. As his company grows the overall focus of the company becomes much more than just sales now he has to worry about multiple employees being happy as well as staying financially sound and making sure his accounting is done properly. Unethical mistakes with a larger business are much more damaging then when Guillermo was by himself working out of his garage. With Guillermo??™s new employees having little regulation and getting more control then before they are given many more opportunities to cheat and get away with it, as well as choosing ethically sound employees Guillermo may need to add controls that allow him to check over everyone??™s work if needed (Horngren et al., 2008).

There are several risks associated with sales forecasts that managers like Guillermo must take into consideration. In addition to these risks, managers need to be aware of the potential problems that can arise if they do not uphold and set the foundation for high ethical standards within the organization. As briefly discussed, top-level managers can influence how lower-level managers react to a budget. Misuse of budgets can encourage employees to lie and cheat regarding budget information. To keep this to a minimum, it is important that managers like Guillermo ensure that they set the example of high integrity and then hire employees who will respect these standards.

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., & Schatzberg, J. (2008).
Introduction to management accounting (14th ed.). Available from the University of
Phoenix eBook Collection database.

Data Source
University of Phoenix. (2004). Guillermo Furniture Store. Retrieved February 08, 2010, from University of Phoenix Simulation, ACC/561