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Date Submitted: 04/26/2011 06:00 PM
Guillermo
Guillermo Furniture Store Flex Budget Assignment
University of Phoenix
ACC 566 Accounting
Professor Marni Nelson-Snyder
11/22/2010
Introduction
Risks Associated With Sales Forecast
“A sales forecast is a prediction of sales under a given set of conditions.” (Horngren, et al., 2008, p. 303) An accurate sales forecast is the foundation on which an effective budget is created. Yet there are many risks associated with creating an accurate sales forecast. As Guillermo considers changes to his business model, he must carefully consider the conditions and assumptions that his sales forecast will be based upon.
One of the risks associated with creating an accurate sales forecast include accurately determining the sales volume. Even if fixed costs and variable costs associated with production are accurate, an incorrect sales forecast, based on inaccurate historical data or changed economic conditions can cause large losses for an organization. For example, a high volume sales forecast where actual sales come in lower then expected will greatly affect an automated production process, such as the one Guillermo is considering switching to. Because highly automated production operations have high fixed cost, they are more adversely affected by reduced sales volumes then those with higher variable costs. In order to do this, he must consider whether the past historical data and economic conditions will be the same in the coming period he is forecasting for. “…the accuracy of all components of the budget depends on the accuracy (in dollars, units, and mix) of budget sales.” (Horngren, et al., 2008, p. 303)
Another risk factor involves his competitor’s actions. Guillermo must consider how his competitors will most likely react to his changes and decide what effect they will have on his revenue. Finally, Guillermo will want to consider the risk associated with the change in product mix that he is considering. Offering different products, at...