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Cost Analysis and Control System: Guillermo Furniture Store

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Cost Analysis and Control System: Guillermo Furniture Store

Accounting/ACC561

October 04, 2010

Cost Analysis and Control System: Guillermo Furniture Store

Guillermo Navallez (Navallez) has several important decisions to make regarding the future of Guillermo Furniture Store (GFS). Computations of return on investment, residual income, economic value-added data, and break-even analysis provide insight for decision-making and development of optimal performance measures. Choosing the most lucrative course of action requires analyzing cost relationships and behaviors, developing a management control system that helps set production standards and goals, and ties managerial efforts to organizational goals.
Measures of Profitability GFS measures the performance of the organization by linking balance sheets from previous periods in 2008 and matching its sales, cost of goods sold, and other expenses in its income statement for June 2008 (see Table One). The table includes return on investment (ROI) ratio, residual income, and economic value-added (EVA) amounts that measure investment-center performance. Table One

Return on investment (ROI) is a measure of financial performance defined as income divided by the investment made to earn that income (University of Phoenix, 2010, Week Six Supplement). The calculated rate of ROI uses percentages as a means of simplifying comparisons between different sizes of investments within the organization, and between different companies within the industry. The negative residual income indicates that the cash income invested in the economic resources does not create value. The company’s rate of ROI is acceptable to production managers at 4.46%, at the same time other managers and the rest of the company are experiencing economic loss of EVA dollars. With cost of capital the same for both mid-grade and high-end...

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