Guillermo_Furniture_Store_Flex_Budget

Guillermo Furniture Store Flex Budget Guillermo Navallez is a furniture maker based in Sonora, Mexico. His once thriving business is suffering from decreased profits caused by increased competition and the introduction of new technology. Therefore, Team D was consulted for the purposes of designing a flex budget. When constructing and evaluating a flex budget, it is important to identify favorable and unfavorable variances, consider the inherent risk associated with forecasting, and identify ethical concerns related to the budget’s implementation. Flex Budget The analysis of a company’s existing budget is performed to identify potential problems and opportunities (Horngren, 2008). Team D analyzed Guillermo’s current budget and discovered several variances requiring attention. With respect to revenue, sales for the mid-grade furniture appeared to be as projected; however; there was an unfavorable variance in high-end furniture. After flexing the cost of goods, the cost for high-end furniture became favorable and for mid-grade it became unfavorable. This reversal could be attributed to the adjustment process. After adjustment, mid-grade furniture production would need to increase to ensure profitability. Consequently, labor wages, office salaries, benefits, and utilities became unfavorable, possibly because of the required increases in production, labor hours, and facility use. During the month of January, the company exceeded projected sales for high-end furniture. However, the company failed to meet the budgeted sales in all subsequent months. Team D has revised Guillermo’s budget. The flex budget presented provides three levels of sales volume. To minimize operational cost and maximize profits, Guillermo should review the forecasted projections. The first six months have shown that the high-end product is not performing as expected. Focusing on the mid-grade product may yield a higher profit margin as its recent performance has exceeded the projections. This shift will increase revenue and decrease the operating expenses, ultimately increasing the company’s profits. Risks Associated with Forecasting The construction of any budget involves a significant amount of forecasting. The sales budget is commonly constructed using a forecast derived from a variety of assumptions regarding the economy, previous sales data, and the expected actions of competitors, suppliers, and customers. The uncertainty associated with sales forecasting may result in a sales budget constructed on flawed data (Horngren, 2008). Another risk factor includes the time and money used to create a forecast. Creating a budget can take up to 30% of a manager’s time and cost millions of dollars for large companies. If the created forecast is based on irrelevant information, the costs are not justified (Horngren, 2008). Despite adequate preparatory work and the consultation of subject matter experts, there will still be a degree of uncertainty remaining. Realistic performance and sales goals must be set to permit employee acceptance of a budget based on sales forecasts. This implementation of reasonable standards allows the workface to regard the goals as attainable and should mitigate the risk of unethical behavior that may result from the implementation of unrealistic goals or budgets. Ethical Considerations The potential for behavioral conflicts when a budget is used as a control device should be considered. The identified goals must be realistically obtainable. If the budget is viewed as too restrictive or unrealistic, employees and managers may be reluctant to accept the budget. This in turn may result in unethical behavior practices such as lying and budget padding (Horngren, 2008). If a budget is used to determine performance incentives or evaluations, managers may be tempted to skew the information they provide to ensure that the resulting budget is in their best interests. Managers may falsely report projected costs and revenues to create a more easily obtainable profit level. This technique also serves as a measure of protection, safeguarding managers in the event of unforeseen increases in cost or revenue shortfalls. The awareness of budget padding has forced its presence to be factored into the construction of budgets. This results in a never-ending cycle of preemptive and correction measures, the net result of which may be a budget based on flawed data (Horngren, 2008). Guillermo should be concerned about the inherent incentives for lying and their ability to provoke unethical behavior. To avoid this undesirable outcome, Guillermo should allot adequate time and resources to formulating a realistic budget forecast. Good planning efforts should be rewarded and incentives offered for goals met; caution should be exercised when considering performance-based incentives. Maintaining ethical standards and adhering to the company’s code of conduct should become an integral part of daily operations. Guillermo’s Furniture Store is currently experiencing decreased profitability. Team D identified variances in the current budget. To correct the problems, a new budget was constructed and submitted. Prior to implementation, Guillermo should heed the guidance provided regarding the risks associated with sales forecasting and ethical concerns related to the budgeting process.   References Horngren, Charles. (2008). Introduction to Management Accounting (14th ed.). : Prentice Hall University of Phoenix. (2009). Scenario: The Guillermo Furniture Store. Retrieved from University of Phoenix, ACC561-Accounting website