Guillermo Furniture Store Scenario
After a new competitor from overseas entered Sonora’s furniture market and one of the largest retailer in the nation opened headquarter in Sonora, Guillermo's Furniture store experienced serious business problems. As a result, Guillermo’s profit margins shrink, as prices fell and costs rose. (UOP, 2009) After conducting some research Guillermo came to the conclusion that he has at least three alternative courses of action to proceed:
• Apply high-tech methods to the production cycle
• Become a representative for another manufacturer
• Differentiate the product by creating a stain resistant coating which will add the value for the furniture
In this paper we will examine the following questions:
• How could Guillermo use budgets and performance reports in his decision-making process?
• How might ethics influence his accounting decisions?
• What accounting information is most relevant for Guillermo to consider when making decisions?
Budgets are planning and control tools for management and, therefore, help to make proactive decisions about business. Being a financial instrument budget includes all revenues and expenditures and provides spending guidelines for the manager as well as sets performance expectations. Guillermo can use budgets to compare his alternatives and carefully examine all avoidable and unavoidable costs. The key to determining the financial difference between alternatives is to identify the differential costs and revenues. (Horngren et al, 2008) The differential costs and revenues analysis is called incremental analysis. By examining all the relevant costs and revenues Guillermo can decide which alternative to choose and, therefore, to obtain the greatest contribution possible. The company will use the contribution to pay the unavoidable costs. The unavoidable costs will remain the same regardless of any decision, so the key is picking the alternative that will contribute the most toward paying off these costs. (Horngren et al, 2008)
• Apply high-tech methods to the production cycle
• Become a representative for another manufacturer
• Differentiate the product by creating a stain resistant coating which will add the value for the furniture
In this paper we will examine the following questions:
• How could Guillermo use budgets and performance reports in his decision-making process?
• How might ethics influence his accounting decisions?
• What accounting information is most relevant for Guillermo to consider when making decisions?
Budgets are planning and control tools for management and, therefore, help to make proactive decisions about business. Being a financial instrument budget includes all revenues and expenditures and provides spending guidelines for the manager as well as sets performance expectations. Guillermo can use budgets to compare his alternatives and carefully examine all avoidable and unavoidable costs. The key to determining the financial difference between alternatives is to identify the differential costs and revenues. (Horngren et al, 2008) The differential costs and revenues analysis is called incremental analysis. By examining all the relevant costs and revenues Guillermo can decide which alternative to choose and, therefore, to obtain the greatest contribution possible. The company will use the contribution to pay the unavoidable costs. The unavoidable costs will remain the same regardless of any decision, so the key is picking the alternative that will contribute the most toward paying off these costs. (Horngren et al, 2008)
References: Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., and Schatzberg, J., (2008). Introduction to Management Accounting (14th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall. Smith, K.T. & Smith, L.M. (2003) Business and Accounting ethics. Texas A&M University. Retrieved July 18, 2009, from http://acct.tamu.edu/smith/ethics University of Phoenix. (2009). Scenario: The Guillermo Furniture Store. Retrieved July 18, 2009, from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx