Flex Budget 1
Flex Budget
Team B
ACC/561
University of Phoenix
May 11, 2008
Flex Budget 2
Flex Budget Analysis
Guillermo Furniture production grew into a thriving enterprise that is now being
threatened by foreign competition. Advanced production technologies are forcing proactively to
remain a profitable business. “In Mexico, attention to ethics is increasingly viewed as an
essential part of business: If your employees are ethical, both within the company as well as with
customers and suppliers, the business is likely to reap benefits in the long-term” (Adler, 2009). In
an effort to exercise ethical behavior the consulting services of “Team B” have been retained to
explore “Flex Budget” options and the key components. A sales forecast is a prediction of sales
based on previous sales performance to develop an analysis of market conditions. A
disadvantage from using past data for current results is that prior information may be obscured.
Therefore, managers must use caution when operating with a sales forecast for their long and
short term planning, due to inherent risks involved.
The most influential risks of sales forecasts stem from unethical decision-making. The
various reasons that lead managers to unethical decision-making and that affect the risks of sales
forecasts. First, managers may want to increase resources to become more productive and aid in
advanced perquisites or salary. Other organizations may use budgets as employee performance
evaluations that cause increased activity in exaggerating company budgets. This form of activity
is considered budget padding, where managers either over or under exaggerate their numbers to
more easily obtain targeted profit goals. A potential risk from this form of decision-making is
that a conflict between upper and lower-level management begins to emerge. This process begins
when lower-level management incorporates bias revenue based on submitted fabricated figures.
This creates a budget slack, in which upper-level management takes actions to compensate for
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the bias. The result is a tangled weave of misleading information that eventually deems the
budget worthless.
Another risk factor is the use of budgets for managerial bonuses. Although such
incentives commonly create motivation, better productivity, and increased quality of work, it
spurs managers to report fictitious information. Management personnel that are short of reaching
their projected sales are more likely to inflate data to obtain rewards. This form of incentive
simply creates an incentive to cheat. Managers who fall short of goals can simply inflate their
reports to match the target budget. Pressures that are placed on managers to meet percentage
criteria too often results in flawed budgets. The outcome is decisions that are based from
inaccurate information as they become more focused on meeting the short-term goals, which
may conflict with the long-term interest of the company.
Overall, the many risks associated with sales forecast are based from unethical behavior.
Various organizations play a role in creating such behaviors, creating high criteria for meeting
targeted goals with promised incentives and perks. Pressures, demands, and offered incentives
often become too large, causing the actions of management to report false data within the budget.
The concept that employees understand the purpose of budget operations and its functions
prevents the proliferation of unethical behavior. In addition, the more employees engaged in the
budgetary process, the less likely employees would report false information.
When an organization attempts to adhere to a static budget, personnel are sometimes faced
with ethical and moral dilemma, when under the possible pressures of adhering to this sort of
budget. If an organization adapts to a flexible budget they create opportunities to have a more
versatile budget provides a better ability to control their budgetary guidelines, with less
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temptations to compromise the organization’s ethical guidelines. Such a flexible budget is
presented to the Guillermo Furniture organization for consideration.
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Flex Budget 6
Guillermo Furniture Store
Guillermo Furniture Store
Flexible Budget
Flexible Budgets For Various Levels of Sales/Production
Flexible-
Activity
Items Budget
Formula
Forecast A Forecast B Forecast C Forecast D
Units
Mid-Grade 2500 2600 2700 2800
High-End 400 450 500 550
Revenue
Mid-Grade $ 509 $ 497,500 $ 517,400 $ 537,300 $ 557,200
High-End $ 879 $ 135,600 $ 152,550 $ 169,500 $ 186,450
Total Revenue $ 1,388 $ 633,100 $ 669,950 $ 706,800 $ 743,650
Variable Cost
Direct Material Mid-Grade $140 $ 350,000 $ 364,000 $ 378,000 $ 392,000
Direct Material High-End $ 250 $ 100,000 $ 112,500 $ 125,000 $ 137,500
Labor Time (Hrs/Unit) Mid-Grade $ 20 $ 50,000 $ 52,000 $ 54,000 $ 56,000
Labor Time (Hrs/Unit) High-End $ 30 $ 12,000 $ 13,500 $ 15,000 $ 16,500
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Direct Labor ($15/Hr /Unit) $ 15.00 $ 43,500 $ 45,750 $ 48,000 $ 50,250
Direct Cost/Unit Mid-Grade $ 175 $ 437,500 $ 455,000 $ 472,500 $ 490,000
Direct Cost/Unit High-End $ 295 $ 118,000 $ 132,750 $147,500 $ 162,250
Total Cost $ 470 $555,500 $587,750 $620,000 $652,250
Unit Price
Mid-Grade $ 199 $ 497,500 $ 517,400 $ 537,300 $ 557,200
High-End $ 339 $ 135,600 $ 152,550 $ 169,500 $ 186,450
Contribution margin
Mid-Grade $ 97,500 $ 101,400 $ 105,300 $ 109,200
High-End $ 23,600 $ 26,550 $ 29,500 $ 32,450
Net Revenue $ 77,600 $ 82,200 $ 86,800 $ 91,400
Plant Overhead/Yr
Salaries $50,000
Utilities $9,000
Benefits (10%)
Insurance $3,000
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Property Taxes $975
Depreciation $50,000
Supplies $6,000
Total Plant Overhead/Yr $118,975
Forecast A Forecast B Forecast C Forecast D
Operation income (loss) $ 77,600 $ 82,200 $ 86,800 $ 91,400
Income Tax Expense 42% $ 32,592 $ 34,524 $ 36,456 $ 38,388
Operating Income After Taxes $ 45,008 $ 47,676 $ 50,344 $ 53,012
Past Budget=>
High-End January February March April May June
Mid-Grade 467 477 487 497 507 517
2458 2483 2508 2533 2559 2,585
Past Actual=>
High-End
Mid-Grade 470 456 442 429 416 421
2460 2522 2585 2650 2716 2787
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References
Adler, Ilya. (2002). Walking the Walk. Mexconnect. Retrieved April 17, 2002, from
http://www.mexconnect.com/en/articles/1750-walking-the-walkhttp://www.
mexconnect.com/en/articles/1750-walking-the-walk
Horngren, Charles T., Sundem, Gary L., & Stratton, William O., Burgstahler, David,
Schatzberg, Jeff (2008). Ch 7 Introduction to Management. Retrieved
from https://ecampus.phoenix.edu/content/eBookLibrary/content/eReader.hhttps://
ecampus.phoenix.edu/content/eBookLibrary/content/eReader.h.
University of Phoenix. (2009). Scenario: The Guillermo Furniture Budget. Retrieved
March 15, 2009, from University of Phoenix, Week One, Acc/561.
University of Phoenix. (2009). Scenario: The Guillermo Furniture Store. Retrieved
March 15, 2009, from University of Phoenix, Week One, Acc/561.