Guillermo Furniture Store Analysis
Guillermo Navallez, as an owner and manager of a specialty furniture store in Sonora, Mexico, has needed to explore many factors to keeping his business profitably operating. With the economy changing around him Guillermo has explored in the past six weeks his budget, performance reports, financial statement analysis, sales forecasts, and most recently the store’s cost relationships and behaviors. The following analysis will discuss the importance of cost relationship behaviors and how that affects Guillermo’s management decisions. It will also cover the current Management Control System, the current break even-analysis, and finally the current: return on investment, residual income, and economic value added. Together these tools will help Guillermo properly make the right decisions for his business as well as contribute to future business model. Cost Relationship Behaviors
Manager’s decisions and prerogative is affected by cost relationship and behaviors in several ways. Simply to predict cost behavior, managers can estimate the company’s future cost at different levels. This is known as forecasting. Too accurately forecast, first Guillermo Furniture Store must determine the company’s variable and fixed cost as well as the goals that he wants to obtain for the company. Guillermo needs to decide whether or not to operate off his current business model or after the analysis if he should change the current business model provides for new policies implicated. Variable costs being a “cost that changes in proportion to a change in a company’s activity or business (investopedia.com).” Fixed costs are those costs “that remain constant, regardless of any change in a company’s activity (investopedia.com).” These costs would be costs such as the mortgage payment on the property due every month. To predict cost behavior, Guillermo must assume the number of units produced is equal to the number of units sold, the cost behavior is linear, and the level of sales and production occurs within the relevant range. The relevant range occurs when sales do not affect cost behavior patterns. Cost behavior explains the changes in the company’s cost in relations to variances of sales and production. Cost Behavior provides managers with important and comprehensive data. With this information managers will be able to determine cost volume relationships and manage operation of the company. In regard to Guillermo Furniture Store, cost allocation best used in determining the method of cost behavior and relationship analysis. Cost allocation is assigning indirect costs to several cost objects through the company that the indirect cost is used. Guillermo Furniture Store can allocate its cost into four main categories: manufacturing, services, sales, and customers and products departments. Guillermo has to monitor each department’s costs. Monitoring each department Guillermo can know which department could use more or less money to function effectively. Guillermo will be able to determine cost driver by customer profitability and costs monitored.
Management Control System
A management control system is a way for firms to gather important product and company information to make well-informed decisions, plan for the future, and evaluate current performance. For Guillermo to establish an effective control system there are at least three major fundamental beliefs that need to be understood: • First, planning and control are the two most closely interrelated management functions. • Second, the human side of the control process needs is stressed to equal or less then the tasks or 'numbers crunching' side. • Finally, evaluating, coaching, and rewarding are more effective in the long-term than measuring, comparing, and pressuring or penalizing (Accel-Team, 2010). As Guillermo is primarily a...