Guillermo Furniture Store Scenario
Guillermo Navallez was running very successful furniture manufacturing business until the 1990s. His hometown Sonora had immense supply of timber for Guillermo’s products as well as tolerable labor cost. The slight premium for his handcrafted products was largely accepted from consumers. During the 1990s market conditions changed with the entrance of the new competitor and the largest retail headquarters presence in the area. The competitor was using high-tech approach and producing competitive furniture with exact specifications. Because of the new technology the competitor was charging very low prices. The expansion of the community and the increased job opportunities caused new people to move in the area. This influx led to increase in labor cost. Those circumstances were the main reason for reduction of Guillermo’s profits. At this point Guillermo needs to make a decision for the future direction of the business. Management will need to consider the relevant accounting information, analyze the budget and the performance reports, and use ethics in the process of making decision.
Guillermo has several options to consider: acquisition from a large company, adopting high-tech approach, becoming a representative of a foreign company, or to focus on the patented coating furniture process. The acquisition or the merger was not appealing to Guillermo and he is not even willing to consider this possibility. For the rest of the options management will examine the budget forecast and the performance reports. “A budget is a quantitative expression of a plan of action” (Horngren, Sundem, Stratton, Burgstahler, and Schatzberg, p. 13).
... of the sales value. Please see the entire cash budget for Guillermo’s furniture store below (Table 3): Table 2: In addition ... Broker alternative operates the furniture outlets, which means one of the competitors relies on the chain distributors. Guillermo could move from primarily ... before the ninety’s, when a new competitor from overseas entered in the furniture market with a hi-tech approach, and ...
The budget reveals the net revenue, overhead, and net earnings for the budgeted units, their dollar values, the planned financial situation, and the variance of the intended amounts. Managers are examining the performance reports for the current state in addition to the possible plans. “Performance reports provide feedback by comparing results with plans and by highlighting variances, which are deviations from plans” (Horngren, Sundem, Stratton, Burgstahler, and Schatzberg, p. 13).
The performance report is showing whether the company spends extra or less from the planed amount. The variance information is the indicator for being off the budget. Analysis of this information will enable managers to weed out the nonproductive elements and introduce new more effective procedures.
The Management team has gathered information suitable for analyzing the projections for the current manufacturing style, implementing the Hi-Tech approach, and the broker approach. Based on the performance report information and the income information managers will need to determine the best solution for Guillermo’s business future.
Bringing a decision that will have long-term effect on the whole company requires use of relevant information and appropriate accounting techniques. Managers will need to determine, the effects from each individual choice on the profitability scale. To proceed toward precise calculations, managers will verify, which cost will change. Careful examination will lead to determining whether only variable or variable and fixed costs will change with certain decision. The cost behavior and the net income will be the most important accounting information for deciding which decision to proceed with. Managers will also need to consider the outlay cost, labor, material expenses, depreciation, total assets, and liabilities as long-term factors for profitability.
... a simple but not simplified view of the decision-making process and how information can make or break the effectiveness of the ... and the fears of the stakeholders in the decision-making process, the right information will be identified and they will be helpful ... be backed up by data and by relevant information that could aid the decision-making process. Maruska and Wheatley (2003, p. 90 ...
Another very important detail to consider is ethics while bringing this decision. “Ethics deals with human conduct in relation to what is morally good and bad, right and wrong. It is the application of values to decision making” (Horngren, Sundem, Stratton, Burgstahler, and Schatzberg, p. 25).
This is very important element for the accounting professionals and businessmen. It has been illustrated in the past that is possible companies to participate with dishonest reporting on the balance statement and the income report, especially in difficult times. Several laws are applicable because of past dishonest reporting and books fixing in certain companies. Guillermo will need to demonstrate high ethical principles when bringing the important decision as well as regular reports. Honest approach even in the though days will increase loyalty with existing business associates. The integrity approach will attract new potential business cooperation that may lead to long- term cooperation.
To conclude, Guillermo is facing unfamiliar situation that requires certain action to save the company. The company has several options available. Managers need to consider the projected budget and the variance from it when deciding for one of the choices. They will determine the relevant information, compare performance reports, and bring ethical decision that will be up to standard. This analysis will release the differences among the possible choices, which will lead to choosing the most appropriate one for the future of Guillermo’s company.