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....