Master Budget And Budgeted Income Statement For Ausquest Limited For 2019

Master budget and its elements

Managerial accounting includes the procedures for creating reports and documents, which would assist the management in undertaking decisions for ensuring smooth business operations. From the perspective of the managers, it helps in identifying whether any project or department is performing well up to the desired expectations (Alsharari, Dixon and Youssef 2015). The master budget is an aspect of managerial accounting, which is the aggregation of all lower-level budgets produced by the different functional areas of an organisation and it takes into consideration the budgeted financial statements, financing plan and cash forecast.

The report intends to cover a brief description of the different elements included in a master budget. The second segment would focus on comparing the top-down and bottom-up approach of budgeting and accordingly, recommendations need to be provided regarding the suitability of one particular approach for an ASX listed organisation. For meeting this purpose, Ausquest Limited is taken into consideration, which is involved in exploring and evaluating mineral resources in Australia and Peru. The organisation explores for a group of minerals like copper, iron oxide, zinc, gold, base metal deposits and others (Ausquest.com.au 2019). Moreover, the third segment would involve the preparation of the budgeted income statement of the organisation for 2019 based on the data of the income statement in 2018. Finally, the report would emphasise on providing opinion regarding the changes in financial performance in the year 2019.

Master budget could be defined as the strategic plan of management for the future of the organisation (Beattie 2014). All aspects of business operations are charted and they are documented for future estimations. Thus, with the help of master budget, the management of an organisation could coordinate the activities related to sales, production, purchasing and other divisions to monitor business progress along with undertaking corrective measures, if needed. The budget is prepared annually and it is reviewed generally in each month. More precisely, all business aspects are represented in this document. The master budget contains a group of elements, which are elucidated briefly as follows:

 

Figure 1: Elements of the master budget

(Source: Carlsson-Wall, Kraus and Lind 2015)

A sales budget projects the selling volume in units and the projected earnings from the sale of such units. A sales budget is often segregated into first, second, third and fourth quarter estimates. The crucial components of a sales budget include projected unit sales, price per unit and allowance for returns and discounts. The budgeted gross sales are computed by multiplying the estimated sales per unit with the selling price per unit. For computing the budgeted net sales, the projected sales returns and discounts are deducted from budgeted gross sales (Bou?ková 2015). For preparing a sales budget, it is necessary to consider the existing economic conditions and production capacity specific to the business. In addition, it is essential to confer with sales staffs at different levels in various positions.

Top-down and bottom-up approach of budgeting

 

Table 1: Sales budget format

(Source: Langfield-Smith et al. 2017)

The production budget computes the units of products that are required to be manufactured and it is derived from a mix of sales forecast and the planned volume of finished goods inventory to be in hand. This is usually identified in the form of safety stock for covering any unexpected rise in demand (Cokins 2014). This type of budget is prepared mainly for push manufacturing system, which is utilised in environment related to material requirements planning. It could be extremely troublesome in developing a comprehensive production budget, which incorporates estimation for each variation on a product that an organisation sells. Therefore, it is necessary to aggregate the estimated information into wider product categories having identical characteristics.

 

Table 2: Production budget format

(Source: Langfield-Smith et al. 2017)

The direct materials budget computes the materials to be purchased within specified timeframe so that the requirements of the production budget could be fulfilled appropriately. This budget is depicted in either quarterly or monthly format in the yearly budget (Cooper, Ezzamel and Qu 2017). For any business organisation involved in selling products, this budget might include maximum proportion of costs incurred by the organisation and therefore, compliance needs to be ensured with adequate care. In opposition, the outcome might erroneously denote excessively low or high cash needs for funding material purchases. However, it is not possible to compute the direct materials budget for all inventory components, as the calculation would be enormous. Thus, the managers need to either compute the approximate inventory amount needed denoted as the sum for total inventory or a detailed level based on the type of the commodity.

 

Table 3: Direct materials budget format

(Source: Langfield-Smith et al. 2017)

The direct labour budget is used for computing the total labour hours needed to manufacture the units itemised in the production budget. In this context, Fullerton, Kennedy and Widener (2014) remarked that a complex labour budget would help in computing the number of labour hours needed along with division of information in terms of labour category. With the help of this budget, the management of a business organisation could estimate the number of staffs needed for the manufacturing area across the budget period. Hence, the management could estimate hiring needs, likely overtime and layoffs. However, since information is provided at an aggregate level, it is not used mainly for lay off and particular hiring needs.

Recommendation for Ausquest Limited

 

Table 4: Direct labour budget format

(Source: Langfield-Smith et al. 2017)

This budget includes all manufacturing expenses except the costs relate to direct labour and direct materials, which are itemised distinctively in the direct labour budget and direct materials budget. The information included in this budget becomes part of the cost of sales item in the master budget. The information included in this budget is among the most essential of the different departmental budget models, as it might constitute of a large part of the overall amount of business expenses (Herschung, Mahlendorf and Weber 2017).

 

Table 5: Manufacturing overhead budget format

(Source: Langfield-Smith et al. 2017)

This budget constitutes of the budgets of all non-manufacturing departments of a business organisation like marketing, sales, engineering, accounting and facilities departments. In fact, this budget could rival the production budget size and therefore, it deserves significant attention (Jack 2015). The selling and administrative expense budget is represented typically in either quarterly or monthly format. This might be divided into segments for particular sales and marketing budget as well as a distinctive administrative budget. Thus, the managers use the general level related to corporate activity for ascertaining the suitable expenditure level.

 

Table 6: Selling and administrative expense budget format

(Source: Langfield-Smith et al. 2017)

The finished goods budget computes the cost of finished goods at the end of each budgeting period. It takes into account the unit quantity of finished goods after each budget period is completed (Klemstine and Maher 2014). However, the actual source of such information is the production budget. The main aim of this budget is to provide the amount related to inventory asset, which tends to appear in the budgeted balance sheet. This is then utilised for ascertaining the amount of cash required for investing in assets. When an organisation is monitoring closely the cash balances on ongoing basis, the finished goods budget needs to be created along with regular updates.

 

Table 7: Finished goods budget format

(Source: Langfield-Smith et al. 2017)

Cash budget could be defined as a budget or plan related to expected cash disbursements and receipts in a particular period. More specifically, the cash budget is a projection of the cash position of an organisation in future (Jiles 2014). Thus, the management of an organisation utilises the cash budget so that it could manage its cash flows effectively. The management needs to ensure that they have adequate cash balance to settle its due obligations. For instance, payroll needs to be paid in every two-week period and utilities should be paid in each month. Hence, with the help of cash budget, the management could forecast loopholes in the cash balance of the organisation along with correcting the issues before due payments.

Budgeted Income Statement for Ausquest Limited for 2019

 

Table 8: Cash budget format

(Source: Langfield-Smith et al. 2017)

A budgeted income statement is defined as a financial report, which contrasts the budged expense and revenue figures with the actual performance numbers accomplished in the period. The management of an organisation uses this statement for identifying the ways through which each department and the organisation has performed during the period (Kaplan Atkinson 2015). At the start of each period, the management mainly sets performance goals and budget, which they expect to be accomplished. These objectives are dependent on performance in previous periods as well as the growth expectations of the management. Hence, the budgeted income statement maintains track of the differences or variances between budgeted and actual figures.

 

Table 9: Budgeted income statement format

(Source: Langfield-Smith et al. 2017)

Budgeted balance sheet is defined as a report, which the management of an organisation utilises in estimating the level of equity, assets and liabilities depending on the budget for the existing financial period (Messner 2016). More precisely, the budgeted balance sheet represents the positions of all accounts at the end of a period; in case, the actual business performance tallies with the budgeted estimates.

 

Table 10: Budgeted balance sheet format

(Source: Langfield-Smith et al. 2017)

All business segments are involved while preparing a comprehensive budget. Due to this, the representatives from all the units are included in the budget preparation process effectively. Generally, a budget committee possibly spearheads the process and the committee is composed of senior-level management in an organisation (Nørreklit 2014). These individuals provide crucial insights regarding all aspects associated with production, sales, funding and other operating phases. Moreover, these individuals are positioned effectively to deliver the most suitable information in relation to their respective units and they need to provide advice on the resource requirements and opportunities within their units.

The work of the budget committee is not over necessarily after the preparation and approval of the budget document. The committee has to bear the responsibility of monitoring progress continuously against the budget along with potentially suggesting mid-course corrections. The decisions of the budget committee could have adverse effect on the fate of particular business units in terms of available resources along with setting the benchmarks to be used for analysing performance. Due to this, the budget committee members would consider their tasks seriously (Otley 2015).  

The construction process of budget would follow the organisational chart normally. Each element of the organisation would be engaged in developing budget information in relation to its unit. Such information is compiled together successively, since it is passed across the organisation until the achievement of overall budget plan. However, beyond the compilation of data, there has been significant variation in the ways the budgets are developed among various organisations. Some organisations follow a mandated or top-down budget approach, while other organisations use a participative or bottom-up budget approach (Otley 2016).

Conclusion

This approach is driven by engaging lower-level staffs in the process of the budget development. The higher-level management might start the budget process with general guidelines for budget. However, the lower-level units drive the budget development for their units. These individual budgets are grouped and regrouped so that a divisional budget could be developed with mid-level executives adding their input along the way (Pavlatos and Kostakis 2015). Generally, the top management and budget committee would receive the entire plan. Therefore, it is crucial for the budget committee to review the different elements of budget in order to assure coordination and consistency. This might need a number of iterations of transferring the budget to the lower levels for revision by lower units. This would assist in reaching the final budget.

This type of budget approach is deemed to be self-imposed. Due to this, Quattrone (2016) argued that with the help of bottom-up budget approach, it is possible to improve job satisfaction and staff morale. Moreover, this approach assists in fostering management philosophy, which has proven to be highly suitable for the contemporary organisations. Furthermore, the budgets are formulated by those individuals having the appropriate knowledge of their own particular operational areas. This would enhance the scope for an increased accurate budget.

On the negative side, this type of approach is usually more expensive and time-consuming in terms of development and administration. This mainly takes place due to the iterative process required for coordination and development. Another significant drawback of this approach is that few managers might attempt to overstate their budgets, which provide them with additional room for inefficiency and mistakes (Shields 2015).

Some organisations follow top-down budgeting approach. These budgets start with higher-level management developing parameters under which it is necessary to prepare budgets and the parameters could be either particular or general. Moreover, such parameters could cover expense levels, sales goals, compensation guidelines and others. The lower-level personnel have few inputs to develop the entire goals of the organisation. The top executives have the shots and lower-level units are minimised essentially to conduct the primary budget computations consistent with directives. The mid-level executives might enhance the budgeting process by refining leadership directives, since budget information is transferred across the organisation.

However, the lower-level managers might see the budget in the form of a dictatorial standard. In such an environment, it is possible to foster resentment. Along with this, these budgets could pose ethical issues, since the lower unit managers might find them in positions to accomplish unrealistic targets for their units (Thomas 2016). However, on the positive side, this approach helps in setting a tone for the organisation. It showcases estimated production activity and sales, which is expected to be reached by the organisation. The successful organisations follow this approach, as it is a suitable communication tool for communicating messages to the staffs so that they could perform accordingly. Therefore, this approach would be suitable for Ausquest Limited so that it could conduct its business operations effectively.

 

Table 11: Budgeted income statement of Ausquest Limited for 2019

(Source: Ausquest.com.au 2019)

In order to prepare the budgeted income statement for Ausquest Limited, the following assumptions are made:

• Revenue is estimated to increase by 10% in 2019
• Since Ausquest Limited does not have any cost of goods sold, as it is a mining firm, the estimation of rise in cost of goods sold by 8% could not be applied here
• The expenses of the organisation are projected to rise by 2% in 2019
• The corporate tax rate of 30% Australia is used to compute the tax expense by multiplying the said rate with profit before income tax.
• It is projected that there would not be loss after tax from discontinued operations, since it has made profit in 2018, while loss was encountered in 2017

By enforcing appropriate marketing strategies, it would become easy for Ausquest Limited in achieving the budgeted income by increasing the overall demand for its products in the market. The increase in overall revenue of the organisation is necessary for the generation of adequate cash flows that would support its ongoing expenses and outflows. As per the projected income statement of Ausquest Limited in 2019, the financial performance is deemed to be unfavourable compared to the past year. However, it has been argued by Van Der Stede (2015) that if considerable research is not made at the time of formulating master budget, the business operations would be affected negatively by the budget procedure.

After analysing the above table, it could be stated that Ausquest Limited would experience a rise in overall income owing to the rise in revenue by 10%. With the help of such increase, the organisation could generate adequate cash flows that would help in meeting its outflows. Due to the rise of 10% in sales revenue, the overall revenue is expected to increase from $2,156,489 in 2018 to $2,372,138 in 2019. Such increase in revenue has helped in increasing the gross income of Ausquest Limited in 2019, since it has no cost of goods sold. However, the increase in expenses by 2% and tax rate of 30% would minimise the overall net income of the organisation, as it has earned income tax benefit owing to the loss suffered in the past year.  

Therefore, the changes in the budgeted figures are overestimated, which has minimised profit for the year of Ausquest Limited in 2019. This is because it has to incur tax expense of 30% on income before tax, while it has earned income tax benefit in 2018. Hence, the budgeted values are not in tandem with the financial statements of the previous year. The overstated expenses that the organisation is estimated to incur would not be able to increase the overall net income in 2019. This has mandated the need for developing the budgeted income statement depending upon previous growth rates.

Conclusion:

From the above discussion, it is inherent that the significance of the budget process is discussed elaborately, which would be advantageous for the companies to use for identifying the overall expenses and income estimated to be spent in future years. Moreover, the income statement of Ausquest Limited is taken into consideration for preparing the budgeted income statement so that the cash inflows generated could be used for covering up the estimated cash outflows. By enforcing appropriate marketing strategies, it would become easy for Ausquest Limited in achieving the budgeted income by increasing the overall demand for its products in the market. Moreover, it has been analysed that the successful organisations follow the top-down budgeting approach, as it is a suitable communication tool for communicating messages to the staffs so that they could perform accordingly. Therefore, this approach would be suitable for Ausquest Limited so that it could conduct its business operations effectively. As per the projected income statement of Ausquest Limited in 2019, the financial performance is deemed to be unfavourable compared to the past year owing to the fall in net income.

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