Guillermo Furniture

Guillermo Navallez is a resident of Sonar, Mexico and owns and operates a successful furniture manufacturing company.   Guillermo enjoyed much success until the 1990’s when competitors began to enter the market and take business away from him.   After conducting his own research of the problem, Guillermo determined he had three alternatives: apply the same high-tech methods as his competitor, become a representative for another manufacturer, or create a furniture coating that differentiates itself from other coatings.   Throughout this paper we will discuss how Guillermo can use budgets and performance reports to make his decision, how ethics can influence his accounting decision, and what information is most relevant to him.

How budgets and performance reports can facilitate decision making

According to Charles Horngren, “a budget is a quantitative expression of a plan of action” (Horngren, 2008, pg. 13).   Guillermo, by drafting a budget, can use it to make his decision making process easier.   Budgets have many redeeming qualities and objectives that would be useful to Guillermo.   First and foremost is a budget promotes planning.   Budgets formulate expected performance and they replicate company objectives.   Budgets force managers to plan for the future and help prepare them for problems that are not foreseen.   After reviewing Guillermo’s budget for his company it appears there are several unfavorable variances where actual costs were greater than budgeted costs.   With better planning, Guillermo may have been able to avoid some of this.   The forced planning is by far the greatest contribution of budgeting to management.

Once a budget is created, Guillermo should begin using performance reports to his advantage.   “Performance reports provide feedback by comparing results with plans and by highlighting variances” (Horngren, 2008, pg. 13).   Guillermo can determine actual results through favorable or unfavorable variances.   Looking back at Guillermo’s budget...