Guillermo Navallez has made furniture for years near his Sonoran home. The area had a good supply of timber for the variety of tables and chairs produced by his company. Labor was also relatively inexpensive. In addition, he priced his handcrafted products at a slight premium for the quality they represented. Overall, life was good for Guillermo (University of Phoenix, 2009). In 1990s two events combined causing a large dent in his business. First, it was new competition from overseas entered the furniture market. Using a high-tech approach, this foreign competition provided furniture to exact specifications and did so with rock-bottom prices. Second of the largest retailers in the nation opened headquarters in Sonora. Due to the influx in people and jobs, there are changes in labor and material costs which force Guillermo to rethink his strategy and try to stay in business (2009).
In order to aid Guillermo to make the best decision, the following issues will be addressed on how could Guillermo use budgets and performance reports in his decision-making process, how will ethics influence accounting decisions and what accounting information is most relevant for Guillermo to consider when making decisions.
First of all, the purpose of budgets and performance reports are to evaluate the manager performance. Budgets help managers to coordinate to implement plan while performance reports evaluate and measure the results against the plan. A budget is a quantitative expression of a plan of action Budgets also help to coordinate and implement plans. They are the chief devices for disciplining management planning. Without budgets, planning may not get the front-and-center focus that it usually deserves (Horngren, p. 13). On the other hand, Performance reports provide feedback by comparing results with plans and by highlighting variances, which are deviations from plans (p. 13). Guillermo can use budgets and performance reports to assist with his decision-making. He can use the information such as income information, sales revenues and operating expenses to evaluate his return on investment as well as his return on equity for the business.
Guillermo can also use previous year??™s budget to perform various analyses to aid him with decisions to possibly cut costs or find opportunities for new process improvement. One of the primary examples that Guillermo could check is the sale forecast. By comparing the budgetary sale units versus the actual sale units of the high-end products, there is an average of about 11% lower than budgeted from January to June sales. The biggest drop off were about 19% in June when the forecast was 517 units and the actual sale was 421 units. Similarly, Guillermo could do other analysis and comparison to evaluate his alternatives for the company.
Essentially Guillermo will have to make the decision that is the best interest of the company and his family. As an owner, Guillermo requires to compare the alternatives and his choices are to upgrade to high tech or partner with a competitor to become a distributor. If the Guillermo decides to convert to high tech automation then he would need to layoff employees because the positions are longer needed. If Guillermo chooses to become partner and a distributor for a competitor then the company faces a different type of dilemma by promoting foreign products instead of producing quality products. The question is how ethics will influence the accounting decisions. As ethics were defined, 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. These values include honesty, fairness, responsibility, respect and compassion.??? We like to think of ethics as simply doing what is right??? (Horngren, p. 25). With that being said, ethics will influence Guillermo in the decision-making process.
Regardless, Guillermo would make his decision on the relevant information. According to Horngren, ???relevant information is the predicted future costs and revenues that will differ among the alternatives.??? The relevant information that Guillermo needs to consider is net income if his company is moving into high tech or become a distributor. Converting his production to high tech would be expensive, but he saw how he could also decrease his production costs dramatically (University of Phoenix, 2009.) Conversely, partner with a competitor could move his company??™s primary focus from manufacturing to distribution. Guillermo also had a patented process for creating a coating for his furniture. Through production, the process first created a common flame-retardant; then, upon further processing, the coating became complete and stain resistant (2009). Guillermo saw a niche market for it.
In reviewing Guillermo information statement, the best alternatives is to go to high tech when the margin and is more favorable compares to become a distributor. As the numbers show, the current net margin is $270K at year end. If Guillermo decides to uses high tech or become a distributor, the income is $910K and $678 respectively. In term, the high tech is a favorable approach for the longevity and long term goal for the company.
University of Phoenix. (2009). Scenario: The Guillermo Furniture Store. Retrieved March 27, 2010, from University of Phoenix, Week One, ACC561.
Horngren, C.T. (2008). Introduction to Management Accounting (14th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.