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Charlie's Furniture Shop

 

Charlie has been expecting us and readily launches into an explanation about how he got where he is. He has been an antique collector for years and decided it would be fun to try to create authentic reproductions 18th century New England antiques. Because of Charlie’s superior craftsmanship, he found a ready market for his product. Charlie did not start out with the intention of going into business. However, his early success prompted him to rent a small shop so his wife would stop nagging him about tracking sawdust all over the house. In order to increase the potential market, Charlie has contracted with a local dealer who will sell Charlie's furniture on a commission basis, leaving Charlie time to do what he likes best, working in his workshop.

Now he has begun to wonder what he has gotten himself into. What started out as a source of relaxation and creativity has suddenly assumed a life of its own. Initially Charlie didn't care whether he made a little money or not, but he now realizes that the volume of work has increased to the point that costs and revenues really do matter. Furthermore, he wonders whether he can break even. Can he make money? How much? He has been making only two or three items a month, but he figures he’ll have to do more than that in order to make money. Charlie is a terrific craftsman, but he needs the help of someone with more experience in accounting to get answers to these questions, so he has come to us for help.

It quickly becomes evident that "Charlie's problem" has become "our problem." The fact that "help has arrived" gets Charlie wound up and he rattles off a series of questions so quickly that it is clear that he has been thinking about this for a while.

  • "How much do I have to sell to break even?"

  • "Can I actually make money at this or am I going to lose my shirt?"

  • "If I can't make money, is there any way we can "fix it" so that I can at least come out about even?"

  • "Everett, my skinflint nephew, called the other day and wanted to know if I would cut a deal to make a set of dining room chairs for his wife for an anniversary present. I sort of hemmed and hawed and told him I would call back next week. "Next week" is coming and I still don't know what to tell him or how to find the answer."

  • "I would really like to get a new table saw. This one (pointing to the one he was using when we came in the door) is old enough so that the blade loses alignment easily and I wind up wasting expensive lumber. However, I really don't know how to evaluate the alternatives available. Furthermore, it seems as though there are multiple issues here. I would have to have the cash to buy it, but then there's the matter of a return on my investment."

  • "Then there's the whole matter of figuring out how much a given items costs me to make. Even if I don't take my time into account, I still have to buy lumber and finishing supplies and pay the rent and utilities. How do I figure out the cost of a chair when the rent is the same every month, but the number of chairs I make varies widely?"

  • "It seems as though there ought to be some way that I can predict how much I might make or lose during a given month..."

Charlie pauses as he realizes that he has asked a whole lot more questions than he can get answered to in one day. Let's look at his questions and the relationship of those questions to the conceptual foundation needed to figure out the answers. The left column in the table below is simply a hyperlink to the appropriate application page[s]. The questions we'll try to answer are listed in the second column, and the concepts required to figure out those answers are in the third column.

Basic Concepts: An Understanding of These is Necessary to Answer Charlie's Questions Daily applications: Charlie's questions

Application Set #1

  • Can I break even? 

  • Can I make money?

  • If so, how much?

  • If not, why not?

Application Set #2

  • My skinflint nephew wants that special deal on the dining room chairs. Should I tell him to take a hike or cut a deal?
  • What about that special deal on material at the lumber yard?
  • The local unfinished furniture shop wants me to sell them chairs that are fully assembled but with no stain or final finishing. It would give me another sales outlet, but they are asking for a really low price.

Application #3

  • Things have been going pretty well and I am looking forward to next year. I sense that I need to do a better job of planning for the future. How do I do that? 
  • How do I project expenses?
  • How do I forecast sales?
  • Can I figure out what my cash balance will be?
  • What about net income?
The following modules are under construction. [Numbering of all modules will change after the entire set is complete.]
  • How do I figure out what it "really" costs me to make a chair?
  • What happens when production varies so much from month to month, but a lot of costs, like rent, stay the same?

 

  • Standards and variance analysis

  • Flexible budgets

  • Is there any way I can get a reliable comparison between what I thought would happen and what actually happened?
  • How do I know how well I am doing?
  • Capital budgeting

  • Present value

  • About that new table saw...!

  • Should I get a dust collector and move back home?

  • Algebraic methods for finding fixed and variable costs [slope - intercept form of the equation for a straight line]
  • Simple ordinary least squares regression; goodness of fit tests; interpretation of results
  • Use of regression and/or algebraic equations for prediction
  • Multiple regression
  • All this jargon about fixed and variable costs is great, but how do I really know what's fixed and what's variable?

The compartmentalization implied by the table above is deceptive. In management accounting [as in so many other areas of human experience] "everything is hitched to everything else."  In many real world applications, the lines between these topics are blurred or nonexistent. Management accounting is a course that builds on itself. The sequence above provides a logical progression so that requisite knowledge is developed as one works through the sections. The sequence of topics is also adapted to the course as I teach it, and provides an overall outline of the Management Accounting Web. Other instructors may do things differently.

If you want to browse through the various sections of the Management Account Web, feel free to do so. However, Charlie is getting impatient. if you are ready to get started, click "Conceptual Foundation," below.

Up | Conceptual Foundation | Daily Applications | Quiz Yourself

Copyright © 2004 Gerald M. Myers. All rights reserved. This site has been developed as aid to instructors and students in managerial accounting. The scenarios contained herein are not intended to reflect effective or ineffective handling of managerial situations. Any resemblance to existing organizations is purely coincidental.
Last modified: August 03, 2005