Rodolfo Furniture Store Budget analysis is important for any corporation. From small businesses to large enterprises; all organizations evaluate the numbers in order to get a picture of where the company stands economically. This will serve as a basis in order to make decisions as to the direction the entity would like to go.
Erroneous decisions can lead to bad decisions that may end up in losses for the company. Rodolfo Furniture is on the verge of making a shift from a furniture maker to distributer. Yet only if the ethical accounting practices have been place into the production of the analysis; can Rodolfo Furniture decide on its future. Budgeting: Risks Associated with Sales Forecast The preparation of the usually begins with a sales forecast. The sales forecast and the anticipated inventory levels determine the production to be budgeted.
Furthermore, the company’s sales forecast along with its experience, and collection policies determine the cash inflows for the company. In the scenario, Rodolfo uses his company’s flexible budget, as a guide, to determine the costs that should have been for an attained level of activity. For, instance if his company intended to manufacture or produce 50,000 units, the budget must have been prepared for 49,000 units, 51,000 units, 52,000, and so on. Major risks in sales forecasting Production risks In a manufacturing environment, like the illustration Rodolfo’s scenario, sales forecast determine production schedules.
The companies use such forecasts to determine the exact amounts of raw materials and production issues; they need to have an idea of what they are to produce. Two problems can occur, sales under forecast or sales over forecast. Under forecast sales refers to the fact when the manufacturer may not produce enough product to meet customers’ demands. This will result in an increase in production times which in turn may increase costs; this will also frustrate customers and may even lead the company to losses.
In the other hand, over forecast sales refers to the amounts of raw material to be purchased and excessive amounts of finished products to be sold. This excessiveness of raw materials may tie up the capital available to use and the excess finished product will make the company incur in warehouse storage costs; both excesses if repeated constantly may put the company at risk of bankruptcy. Resource risks When sales are over forecast, underutilized workers may have to be reduced. This action will result in a bad image for the company and will break the trust/bond that was built between the company and the workers as they will feel betrayed.
If the sales are under forecast, it will happen the exactly opposite, the company will lack of workers to meet demands. This can result in bad image, losses, service levels will be affected as workers would have to work overtime to cover for the company which can lead to sicknesses and excessive absenteeism. Financial risks This type of errors affects the company’s financial health. The excess of material will lead to excessive costs of unnecessary storage since the excess should have never occurred. Also, over forecast can result in the purchase of unnecessary machinery.
Furthermore, if the company forecasts erroneously in a consistent manner, this can lead the company into a raise in the interest by lenders. Sales forecast are prepared using data available, the more reliable and certain the data is the more accurate the budget is expected to be. Ethical considerations in the preparation of budget Before the development of a budget it is wise to consider the ethical involvements that can be present during it process. Incentives to lie and cheat are Rodolfo tempting actions for managers.
Horngren (2008) stated, “It is common for managers of larger units with more resources to have higher pay, higher status, and greater prospects for promotion” (p. 301). This is common ethical flaw from the workers. The organizations have to prepare ways to identify, minimize and discourage this kind of behaviors. Subsequent use of the budget After completing the budget process, the information populated contains useful components that benefit the manager’s strategies behavior. According to Horngren (2008) there are four major benefits of effective budgeting.
The mention benefits are: evaluation of activities, formalization of planning, performance evaluation, communication and coordination. By following the Rodolfo Furniture Scenario the four major benefits helps the mention company presented at the outgoing sentences. For the first benefit the main idea is the reevaluation of the actual activities and the evaluation of the opportunities to embrace new ones. The scenario display at the week 2 assignment, the foreign competitors surpass the actual company production because of the high-tech solutions use by them.
The first benefits assist with the decision of changes in this matter. With the formalization of planning is an essential phase that every company has to experience. This benefit encourages managers to prepare contingency plans for the performing of immediate actions, pre-planned, at the moment of crisis. For the performance evaluation the most important fact is that the results of the recent analyze performance helps to take a more precise action because of the recent events than comparing with the last year performance.
For the Rodolfo Furniture Scenario applies, because of the latest changes in the business, related to their company’s specialty, that is affecting gravely to his sales and requires an instance action. Lastly with communication and coordination this process allows the managers to create a macro communication because involves the input of employees from top to bottom and vice versa. Consider how the organization’s code of ethics requires an ethics analysis for any performance tool. Companies have developed a code of ethics or conduct as a tool to prevent the misuse of power, fraud, conflict f interest, money, and other. Mostly all ethical dilemmas start with dysfunctional incentive, poor supervision, and wrong personal habits. To ensure the reliability of the information and prevent situation of misleading or faulty information from accountants the Sarbanes-Oxley Act was created. This 2002 Act requires regulations in the financial practice and a code of ethics “for seniors financial officers, applicable to its principal financial officer and comptroller or principal accounting officer, or persons performing similar functions” (Horngren, 2008, Chapter 1).
Now managers has to approved and been concern of the budget. Also requires external auditors to examine the company. These regulations in the accounting system search for the reliability of the information provided. But it needs high ethical standards from the personnel. The Institute of Management Accountants develop a code of conduct require to CPAs and CMAs that integrated integrity, confidentiality, credibility and competence. Ethics should be the priority in a company. To encourage others and prevent unethical behavior, unnecessary pressures should be recognize and detained.
Sometimes dysfunctional incentive arises when managers or accountings are assessed on the performance concerning to budget amounts. The ethical standards of an organization are necessary to guide, measure, and analyze the performance of the personnel. Most important a code of ethic is essential to maintain the integrity and confidence of the company.
Horngren, C. T. (2008). Introduction to Management Accounting (14th ed. ). Retrieved from The University of Phoenix eBook Collection database..