Budgeted Income Statement Of A.P. Eagers Limited: Master Budgeting Approach

About A.P. Eagers Limited

The aim of the report is to throw the light on the budgeted income statement of the ASX Company who is operating the business operations in the Australian market. The budgeted income statement of the company reflects the forecasting of the increase in the revenue and expenses of the company for the future. The report require to prepare the budget for real life company due to which A.P. Eagers Limited ASX listed company has been selected and the company is operating their business in the Australian market. The report majorly focuses on the budget and the approaches which are used by the company while preparing the budgets of the company. The discussion related to the elements of the master budget will be stated. The major components of the master budget and the way to prepare it have been discussed. The major differences in the approaches of budgeting will be explained. A.P. Eagers Limited needs to implement one of the approaches while preparing the budget. The income statement for 2019 (budgeted) of the A.P. Eagers Limited has been prepared with the help of 2017 income statement of the company.

A.P. Eagers Limited is owned and operates the motor vehicle dealership in the Australia market. The company majorly operates the business in the four segments which include car retailing, truck retailing, property and the investments (Freedman, 2018). The company majorly sells the new and used motor vehicles with this it distributes and sells the parts with the accessories and many other aftermarket products. The company is also indulged in the auctions of the motor vehicle with this its operations are majorly present in Southern and central Queensland, Adelaide. The company was formed by Edward Eager with his son Frederic in the year 1913 (Bloomberg, 2018). Since then, the company is continuing as the wholly-owned subsidiary of the A.P. Eagers Limited (Freedman, 2018).

Master budget is stated as the accumulation of the organisation lower-level budgets which are prepared due to various areas of the functions presents (Freedman, 2018). The master budget is the estimation of the operational and functional activities of the company. In order to completely prepare the master budget, it is must for the company to achieve the sub-budgets that contribute up to the master budget. The term master budget itself define that it is the combination of the different sub-budgets and these sub-budgets are considered as the elements of master budget. The detailed explanations of these elements are: –

Elements of Master Budgeting Approach

The preparation of the master budget by the companies begins with the sales budget because this budget provides the guidance to the rest of the budgeting process which is conducted by the company. This budget is considered as the guiding budget as it guides the rest of the process of budgeting because of the level of production which is direct links with the forecasting of the sales of the company. To proceed with the sales budget of the company, the management usually makes use of the current and prior year sales for initiating to make the educated guess on the following year’s sales figures (Chen, Weikart and Williams, 2014). Once the company make the prediction for the level of sales, the information is going to be converted into the units of the sales which help in determining the amount of the units that are required majorly to meet the projected sales. Moreover, in the production budget, the amount of figures gets adjusted by the amount of the inventory that is maintained by the company. This amount is adjusted with the motive to identify the amount of inventory that is required to be produced (Accounting tools, 2018).

The formation of the master budget needs the inventory budgets which are made up of the direct materials, labour and the manufacturing overhead budget which provide the assistance to the company to determine the material, labour and overhead amount of products which will be required to the company at the time of manufacturing the products for the selling it into the market (Cox, 2014). Further, this budget contributes effectively in identifying the related sales and administrative expenses which will be faced by the company in the near future. Thus, it becomes essential for the company to accumulate the sub-budgets to form the master budget.

The cash budget is considered as one of the important sub-budgets which are created by the company at the starting of the financial year. The budget is useful for the company in order to predict the revenue that the company will receive and the expenses that company has to pay (Shcherbina and Tamulevi?ien?, 2016). This has been found that a cash budget helps the company in predicting the receipts and payments. Further, for some of the companies, the cash budget reflects the end of the process of budgeting and the other companies go on to the complete budget financial statements.

Budgeting Approaches

The prediction or estimation of the financial statements needs the predicted amount present in the income statement with the balance sheet which is majorly used by the company (Y?lmaz, 2018). The use of the financial statement is to review the position of the company in the market so that they can work effectively to improve the same. After finalizing, the budget information of the business is approved over into the budget field for every line item in the financial statement within a business accounting software (Accounting tools, 2018). The budgeted financial statement is essential for the company in predicting the financial positions, results, and the cash flows of a business as the various dates in the near future.

In the budget preparation, the accountant of the company ensures that budgeting approach is utilized effectively which can be both top-down approach and the bottom-up approach. A budget is one of the financial plans for the saving, borrowing and spending money. A budget helps the company in identifying whether it can operate based on the estimated income and expenses for a particular period of time (Garrison, Noreen, Brewer and McGowan, 2010). There are several types of budget approaches which include: – Zero-based budgeting, Top-down budgeting, Flexible budgeting and Bottom-up budgeting

In this approach of budgeting, the top management forms the budgets for the departments that are based on the combination of the predicting for the future expenses and revenue with the previous year’s actual budget results and send the money down to the university pipeline. This shows that it begins with top and ends at the lower department within the organisation. This budgeting process can be effective for the lower management because they do not have to spend the time to form the budget for the company and its related operations (Hilton and Platt, 2013). This approach saves the time for lower management who are majorly involved in the process of operations rather than the overall strategic plan. Though, the approach also has a disadvantage which shows that the budget is formed by those who directly indulge in the daily operations of the department and may not be aware of the specific expense that is linked to the department (Kaplan and Atkinson, 2015).

The bottom-up budgeting starts at the bottom of an organisation and gets approved by the top management. The budget is decided by the lower level management and it is further presented to the top level management majorly for the approval (Noreen, Brewer and Garrison, 2014). The top-level management review the budget and then approve the budget which is proposed or send it back down to the lower management with the motive to review and modify the same. The bottom-up budgeting is a good thing for the lower management employees of the company because it is based on the needs of the specific department because they are more familiar with the needs that are required like labour, capital, suppliers to meet the goals (Pilbeam, 2018). Though, this approach also leaves a disadvantage for the company because they remain unaware of the strategic plan of the company. Further, the approach is flexible enough as the departments of the companies are not supposed to think for the top level management plans with the planning of resources. This means that in this approach the departments of the companies doesn’t think for the capital investment.

Basis of comparison	Top-down approach	Bottom-up approach
Budgeting	In the corporate budgeting, this approach majorly initiates with the setting of the limits of the amount that can be spent by the company as the whole. This helps the company in estimating the amount that will be required to every department so that they can arrange the amount which will be required by them (Wildavsky, 2017).	Bottom-up approach method makes the department to undergo with the underway that means they prepare their own budget.
Goal setting	The setting of the gaols is considered as the most essential elements which are considered. The higher management set the goals for low management at the time of budget preparation.	This has been found that the bottom-up process, the departments have their own goals and they lack in setting the goals from the organisation’s point of view. These goals majorly include the human resource needs, departments operations management cost.
Business forecasting	In the top-down approach, the forecasting is done considering the sales channel, geographic sales regions.	In the approach of the bottom-up, the estimation for every specific product is done by the departments of the company.
Historic data	This approach guides the high level management to make use of the past records from the data system management which majorly include the revenue and sales of the organisation.	On the other, the approach doesn’t make use of the historical data while preparing the budget which is one of the factors that can affect the prediction of the budget.
Employers involvement	The employer includes the senior manager of the company who majorly provides the opportunity of work to workers. These employers get involved in this approach while preparing the budget for the company (Gitman, Juchau and Flanagan, 2015).	Though, in this approach of budgeting, the major involvement is of the employees who perform the daily operations within the company. The budget is prepared by the lower manager of the company which means the involvement of the senior employer is missing is this approach of the budget.
Allocation of targets	In this approach of the top-down, the targets are formed by the senior management of the organisation and then they allocate the targets to the lower executives.	The bottom-up approach says that the allocation of targets is majorly done by the lower level management departments because they itself prepare the budgets.
Time-consuming	In the master budget preparation, the time taken by the senior or top management is high because they make use of the analyses and interpretation of the historical data while preparing the budget. Along with this, the top management discusses the facts with the different managers of the departments while preparing the budget. Thus, this approach is considered as the time-consuming approach.	On the other hand, the bottom-up approach is considered as the less time-consuming process because it only involves the budget preparation only for their own departments instead of the entire organisation.

Comparison of Top-Down and Bottom-Up Approaches

The analysis of the approaches with the comparison helps in understanding the approaches effectively. It is suggested to the A.P. Eagers Limited to select the bottom-up approach while preparing the budget for the organisation. The reason behind suggesting this approach is that the company deals the operations majorly in the four different segments due to which they need to maintain the different departments of various business units. The implementation of the bottom-up approach provides the benefit to the company as they don’t prepare the budget as every department will prepare their own budgets. All these budgets need to approve by the top level management so they can easily find the differences and can improve the same (Trotman and Carson, 2018). Along with this, the budget formation will not take the time which will lead to the quick and effective decision by the company. Further, the employees will be able to attain the different skills which will help them in bringing personal development. The bottom-up approach is found suitable according to business operations.

A.P. Eagers Limited budgeted income statement for the year 2019 is prepared based on 2017 data. Though, this has been found that 2018 income statement of the company is not disclosed due to which the budgeted income statement has been prepared with the help of 2017 income statement (A.P. Eagers Limited, 2018). These adjustments are related to the sales, expenses and the cost of goods sold by the company.

Statement of Profit or loss of A.P. Eagers Limited
	Actual	Budgeted	Variance
Particulars	2,017	2,019
	$	$
Revenue	4,058,779.00	4,464,656.90	-10%
Other Gains	17,934.00	19,727.40	-10%
The share of net profits of associate	407	407	0%
Changes in inventories of finished goods and work in progress	27,645.00	29,856.60	-8%
Raw materials and consumables purchased	(3,374,157.00)	(3,644,089.56)	-8%
Employee benefits expense	(331,009.00)	(337,629.18)	-2%
Finance costs	(24,598.00)	(25,089.96)	-2%
Depreciation and amortization expense	(16,651.00)	(16,984.02)	-2%
Other expenses	(222,721.00)	(227,175.42)	-2%
Profit before tax	135,629.00	263,679.76	-94%
Income tax expense	(37,456.00)	(38,205.12)	-2%
Profit for the year	98,173.00	225,474.64	-130%
Note: The share of net profit of associate cannot be predicted for the year 2019 due to which it remained unchanged. The income statement of 2017 is available instead of 2018 due to which the budgeted income statement is based on 2017.
It is assumed that other gains of the company will also increase by 10% with the rise in revenue.

This has been found that in the year 2017, the company was earning the profit which increases in the budgeted year that is for the year 2019. The revenue of the company increased which directly created an impact on the profit of the company. The maximum variance which has been identified is in Profit for the year with approx. 130%. Thus, this shows that if the revenue of the company will increase then they will be able to earn more profit for the year. This variance has been witnessed after deducting the tax from the profit of the company. Further, the profit before the tax shows that there is 94% variance in between the 2017 and 2019. The variance shows that the company can easily invest their amount in other operations which will help the company in earning the effective returns. Along with this, the company can try to reduce the expenses so that they can increase the profit which will help them in making the investment with an effective amount.

The investment by the company in the market contributes in improving the goodwill and brand value. Along with this, it will help the company to bring the improvement in the revenue earned by the company so that they can manage the obligation and expense with this they can save the amount in the reserve of the company. These reserves can be utilized by the company later on for the purpose of the investment. This has been found that the expenses of the company are limited and this can be said that in the near future the uncertain expenses might arise which will reduce the profit of the company.

Conclusion 

In the end, this can be concluded that the above analysis majorly talks about the master budget and its related elements. The components of master budget are stated with the detailed explanation and their uses in the formation of master budget. Along with this, the discussion of the top-down approaches and the bottom-up approaches of budget explained with their comparison. The company that has been selected for the ASX list is A.P. Eagers Limited, who is operating the business operations effectively in the market of Australia. Further, the suitable approach which is recommended to the company is the bottom-up approach because the company is operating their business operations at the different places due to which this approach remain suitable for the company. The companies estimated income statement for the coming year is prepared based on previous year. The major changes or adjustment has been done while preparing the budgeted income statement. Further, the variance has been calculated which is essential for evaluating the changes that have taken place.

References 

A.P. Eagers Limited (2018) About Us [Online]. Available from: https://www.apeagers.com.au/apeagers-company-info/ [Accessed on 31^st January 2018]

A.P. Eagers Limited (2018) Annual report 2017 [Online]. Available from: https://www.apeagers.com.au/wp-content/uploads/2018/04/1790804.pdf [Accessed on 31^st January 2018]

Accounting tools (2018) Budgeted financial statements [Online]. Available from: https://www.accountingtools.com/articles/what-are-budgeted-financial-statements.html [Accessed on 31^st January 2018]

Accounting tools (2018). Production Budget. [Online]. Available from: https://www.accountingtools.com/articles/2017/5/15/production-budget [Accessed on 29^th January 2018]

Bloomberg (2018) Company Overview of A.P. Eagers Limited [Online]. Available from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=876713 [Accessed on 31^st January 2018]

Braun, G. (2017) Top Down or Bottom Up Corporate Budgeting – Which One is Best?. Retrieved from: https://www.truesky.com/top-down-or-bottom-up-corporate-budgeting-which-one-is-best/ 

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Cox, P. (2014) Master budget project: Analysis of cash budget report. Strategic Finance, 95(9), p.52.

Freedman, J. (2018) How to Complete a Master Budget in Managerial Accounting [Online]. Available from: https://smallbusiness.chron.com/complete-master-budget-managerial-accounting-55976.html [Accessed on 31^st January 2018]

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Gitman, L. J., Juchau, R., and Flanagan, J. (2015). Principles of managerial finance. AU: Pearson Higher Education.

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