Guillermo Furniture Store

Guillermo Furniture Store

Guillermo Furniture Store is a small custom built furniture business reviewing affects of increased labor costs and increased competition. Mr. Guillermo is faced with making decisions on how to respond to these changes affecting his business. He is using and reviewing basic accounting principles to help him adjust his business plans and to create a new strategic business strategy. Cost relationships and behaviors are used in his decision-making prerogatives. Deciding on a control system, reviewing a break-even analysis, and computing return on investment will help Mr. Guillermo build a strong plan for his businesses future.

Cost Relationships and Behaviors

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Managers are required to make decisions about organizational resources in order to maximize the value of the firm. By understanding the theory and practice of cost management, the managers of Guillermo will be able to make effective economic decisions. According to Hongren (2008), cost behavior is the way in which a cost reacts or responds to changes in the level of business activity and the ability to predict how costs respond to changes in activity is critical for making decisions, controlling operations, and evaluating performance. Managers are able to estimate the amount of costs that are expected to be incurred at different levels of activity when they are able to predict cost behavior. The primary function of managerial accounting is estimating costs which are the heart of budgeting and forecasting. In order to effectively plan a manager must be able to anticipate and if a cost can be expected to change and know how much it will change. It is a manager’s ability to recognize and measure cost behavior that helps to avoid problems.

Controlling cost properly is one of most important activities a company performs. A company has more control of costs then it does of revenues. Many companies have felt the devastating effects of making poor financial decisions...