The Oriole Furniture Inc. ( ) - Case Study Example

Finance and Accounting 05 March Case Study 2: The Oriole Furniture Inc Oriole Furniture, Inc is a thirty year old distributor of high quality imported furniture. It has four divisions categorized as teakwood, antiques, rosewood, and rattan supported by four centralized staff departments such as finance & control, marketing, purchasing and engineering. Rattan Furniture Division was established four years ago. For the last three years, the company claims to have an annual sales growth rate of 35% and the sales were $60 million last year. The three main product lines they have are a living & dining room, bedroom line and outdoor patio line. The sales and production activities of all the three lines are managed by Mr. Mente. Each division’s vice president prepares an annual profit plan, in which the result of estimation for the year has been a profit of $22.7m and the sales volume is $77m. Mr. Menson, the company’s president, has not been satisfied with the submitted profit plan. He wants a profit of $23.9m on a sales volume of $81m. When the actual performance of the division is compared with the budget, Mr. Mente finds that sales remain at 11% below plan and profit is 18% below plan. The challenge before the company is that the division failed to meet the budgeted requirement during the year, and the company may consider action in midyear to ensure it reaches its budget by year-end. What does Mr. Mente need to do? What is he proposing to do about his situation? Mr. Mente should revise the plan to reach up to the new sales budget. He should try to figure out the reason for the difference in actual performance with the budgeted performance through a complete analysis of the situation. The reasons he will explain to his top manager for not attaining the expected performance are the tough economic situation and old machineries besides the difficulty in finding good furniture designers. To achieve the company’s profit objectives, Mr. Mente has planned to delay the purchase of some new machinery which costs $500,000 and to forego hiring two new furniture designers. But it is better to replace the old machinery that broke down frequently and led to over time labor, which will decrease the labor efficiency and delayed delivery schedules. This investment, in fact, is an asset for the company and will speed up the production process. He should drop the idea of hiring new furniture designers so that he can save $100,000 in salary expenses. He can give training and counseling to improve the existing workers performance. What are budgets supposed to do and what must Mr. Mente do in the next seven months to (probably) keep his job? Budget is a process of planning the use of resources over a definite period of time. It should motivate individuals to achieve performance levels agreed to and set forth for a better control and coordination of activities, the company may prepare budgets for each and every activity which, in turn, helps in reducing production costs. Mr. Mente has to identify the reason for the variance in actual performance and budgeted performance. Knowing how much is being spent each month will enable him to consider whether further action needs to be taken to spend in future. This process is only worthwhile if the budget is realistic. Analyzing variances against an unrealistic budget is pointless. However, in a well-run organization the comparison between actual costs and budget is used as the means for attaining the set goal. The difference between budget assumptions and actual outcome is the key issue that Mr. Mente faces. He can use variance analysis techniques to solve the issue. Mr. Mente has to start his work from the bottom line. He needs to motivate the personnel and evaluate their performance. The company also needs to invest in better equipment to increase productivity without increasing the cost towards hiring more people. The company also anticipates an increase in price of the raw material up to 6%. So Mr. Mente should ask the factory personnel to be careful about waste of raw materials to reduce the cost. The company can raise the price of its products so that they can increase the sales volume and profit. They can offer some discounts and gifts too, especially during festive seasons. They should focus more on quality of the products and project these features in their advertisements as well. Can a budget be a part of personnel evaluation? “Master Budget is a summary of a company's plans in which specific targets are set for sales, production, distribution, and financing activities and that generally culminates in a cash budget, budgeted income statement, and budgeted balance sheet” (Master Budget Definition par. 1). Personnel evaluation is a method for evaluating the job performance of employees in an organisation in terms of quality, quantity, time and cost by the concerned department manager. By comparing actual performance to the budget, deviations can be ascertained and rectified. Personnel costs are often the dominating cost factor for any organizations. A budget is a guiding force for the managers to think and plan for the future. In the absence of a proper budget, angers will remain engaged in daily activities. So budget is a benchmark for evaluation. Budget has to be prepared in accordance with the personnel decisions taken by the organization like allocation of the organizational rewards such as salary increases, bonuses, etc. In order to achieve the budgeted plan, Mr. Mente should re-train the personnel to increase their skill and efficiency. Based on their effective performance, the company can accomplish its mission. Hiring people is expensive and time consuming, and even risky too, if later it is found out that companies do not really need more employees. Conclusion: Oriole Furniture, Inc case describes the annual budgeting process of their Rattan Furniture Division. The Division has failed to attain the company’s profit objective. Budget provides a base for measuring the actual performance of the company. Necessary action should be taken in order to get the best result. In Oriole Furniture Inc., the process will come to an end after the comparison of the result with the budget. If no action is taken to rectify the differences, then there is no point in producing them and even no need to waste management time discussing them. Finally, the budget must be linked to realistic plans and strategies; otherwise, it will become a meaningless effort. Works Cited Master Budget Definition. Accounting for Management. 2011. Web. 05 March 2012. < http://www.accountingformanagement.com/master_budget_definition.htm > Read More