Guillermo Furniture Store Scenario
Guillermo Furniture store is a furniture manufacturer operating in Sonora, Mexico. The owner, Guillermo Navallez, has experienced shrinking profits and rising costs. A competitor has entered the market using a technique that produces quality furniture which they sell at rock-bottom prices. Sonora has experienced a population growth which has resulted in higher labor costs. In order to continue his business on his own terms, he is faced with one of three decisions that include converting to a new production model that would decrease his production costs, become a representative for another manufacturer, or market his flame retardant coating method. The information that Mr. Navallez must use should be relevant information that directly affects the future outcome. Says Charles T. Horngren, Gary L. Sundem, William O. Stratton, David Burgstahler, and Jeff Schatzberg, “Making business decisions requires managers to compare two or more alternative courses of action.” They further conclude that ” That is, relevant information is the predicted future costs and revenues that will differ among the alternatives.” (p. 198)
Mr. Navallezs use of budget and performance reports are relevant pieces of information that will help him decide the future of the company. For example, the companys budget shows a loss of income for mid-grade furniture. The company is producing more than what is expected which means the production costs are higher than expected. Also, the variance analysis shows how much more or less is actually being produced and what the associated costs are. This information will be helpful to Mr. Navallez in predicting how future months may fare at the current production process versus the outcome of actual figures after the implementation of a new production process. Another tool would be the income statement. “In many cases, income statement information is relevant to decision making because it specifies how alternative choices impact income. Additionally, since executives use income statements to evaluate performance, managers need to know how their decisions will affect income as reported on the statements.” (Horngren, et al. p. 201)
The role of a good accountant will aid Mr. Navallez with his difficult decisions by helping him focus on the relevant information that is most important. ” The accountant??™s role in decision making is primarily that of a technical expert on financial analysis who helps managers focus on the relevant information that will lead to the best decision.” (Horngren, et al. p. 198) Both the accountant and Mr. Navallez should be mindful of ethics in such cases. The information may be costly and difficult to obtain, but proper reporting and transparency when dealing with others is a position that cannot be compromised. If Mr. Navallez intends to become a representative for the other competitor, he must present the company in full transparency.
At this point in Mr. Navallezs company, certain information is more important than others for him to make optimal decisions. For example, while salaries of staff members are important, how much capital is needed to purchase the technology needed to reduce production costs is more important. This is where the companys assets shown on the balance sheet is critical. How much the company has in outstanding debt may hinder loan approvals and cash on hand balances may need to be higher than what is on hand to qualify for a loan. Production costs for direct labor and inventory should also be taken into consideration. ” The degree to which information is relevant or precise often depends on the degree to which it is qualitative or quantitative. Qualitative aspects are those for which measurement in dollars and cents is difficult and imprecise; quantitative aspects are those for which measurement is easy and precise.” (Horngren, et al. p. 200) The quantitative data is what should be used to help make the major decisions Mr. Navallez is facing for his company. Gathering, analyzing, and interpreting the accounting information found on the companys reports should be done with the help of an accountant and the executives of the company. Managers may also be called to provide detailed operational data that is qualitative in nature.
The future of Guillermo Furniture Store is facing issues common to other companies. Making the best decision comes from using the most accurate and relevant information.