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Managerial Accounting

Case study

Oriole Furniture INC Case Study
From January to May, the actual performance was not that good as budgeted due to the economy recession—
they managed to meet the first three months’ expected sales but failed the following two months due to the
deepening recession. Mente was quite concerned over the current situation of Rattan division because his
performance—his year-end bonus—was measured by the profits earned by the division. As well, his current
position was tightly tied to his performance. If he could not address some solutions to help him out, it would be a
disaster for him. Yet, he was not uncertain that how long the economy recession would last, so he had to try
some different measures other than merely raising the sales to get out of the situation in the next 7 months of the
year.
The sales backlog ratio provides an indicator of the ability of a business to maintain its current level of sales.
When measured on a trend line, the measurement clearly indicates changes that will likely translate into future
variations in sales volume. For example, if the sales backlog ratio exhibits an ongoing trend of declines, this is a
strong indicator that a business is rapidly working through its backlog, and may soon begin to report sales
reductions. The opposite trend of an increasing sales backlog does not necessarily translate into improved future
sales, if a company has a bottleneck that prevents it from accelerating the rate at which it converts customer
orders into sales.

In this case, the actual sales backlog ratio is 30060000/ 23000000 = 1.05, while the budgeted sales backlog ratio
is 33780000/ 35650000 = 0.95. So the sales backlog ratio can be mentioned by Mente when he meets Mensan,
because the actual ratio is higher than the budgeted one, which somehow indicates possible improved future
sales in the next seven months. However, this method relies on the Rattan division’s production capacity, and it
can be used as a supporting method for flexible budget method to convince Mensan.
As one of the four divisions of Oriole Furniture, Rattan Furniture division, a profit centre, had been established
four years earlier before this case was presented. For the past three years, its sales growth rate had been 35%
on average, with last year’s sales being $60 million. Each division of Oriole Furniture made a profit plan six
months before the start if the plan year. The method they used to make the profit plan is Output/Input Approach
or Top-down Approach, which means that the budgeted plan starts with the sales forecast and then works
backward to budget the inputs such as variable expenses and fixed expenses. To be more specific in this case,
the product specialists and the field sales force forecast the sales of Rattan as $75,130,000 and $77,010,000,
respectively.
The forced sales forecast of Rattan by the product specialist and the field sales $75,130,000 and $77,010,000,
respectively. Finally, Mente decided to use $77,010,000. We can see that this number was kind of little lower
than the possible forecast sales based on the average sales growth rate of previous years, that is, sales of last
year $60 million X sales growth rate 35% = $81 million, because Mente was worried about the direction of the
economy. However, after Mr. Mensan, the company President, reviewed Mente’s plan, Mensan pushed Mente to
revise his sales plan to $81 million and Mente agreed finally.
The fact is that Mente had performed well for the past several years in his position and the division’s sales had
grown at a high average rate of 35%. But another fact has to be recognized that the first five months had
witnessed the economy recession, which led to the sales reduction, and there was no certainty that this recession
would cease in a short period.
All these facts could support the need of readjusting the original budget profit plan. Possible readjustment of the
budget could be to use 28% (budgeted annual sales = $60*1.28 = $76.8 million) as the budgeted growth rate
instead of 35%. This readjustment under the recession period would be reasonable and convincible, and would
help Mente out if he could persuade Mensan to accept this adjustment.