Managerial Accounting is the provision of financial and non-financial information which is beneficial for the manager to take the better decisions. This provision is beneficial in making decision, develops a plan and controls the function to assist the management in the context of implementation of an organisation strategy (Shields, 2015). Manager has to develop a budget in order to organise an events in the company or to adopt the strategies. It is a fact that the companies develop the budget before implementing the plan in the organisation in order to operate effectively in the market (Karmakar, 2018). This report is based on the budget of the company. Asaleo Care Limited has been taken into consideration in order to develop the income statement budget of the company.
In the beginning of the report, the master budget of the company will be discussed. After that the discussion is made on the two approaches of the budget such as top-down and bottom-up approach. In the end of the report, the income statement budget is prepared with the income statement of the company.
Asaleo Care is a leading company in personal care and hygiene products. The company manufacture, distribute, sell and marketing the goods. The company manufacture the consumer products such as Feminine Care, Incontinence Care, Baby Care and Professional Hygiene product categories. Products of the company used in daily life of Australia, New Zealand, Fiji and in the countries of Pacific. The main purpose of the company is to manufacture hygiene, health and wellbeing product of everyday life. The company earned the profit of $57.2 million in the year of 2017 (Asaleo Care, 2018).
Master Budget is a collection of lower level budget of the company’s different departments. This budget is made by the head of department and the top management of the company. It includes the financial statements, cash forecast and a financing plan. The master budget of the company is presented in either a monthly and quarterly format and sometimes it includes the company entire year (Accounting Tools, 2018a). Explanatory text is included in the master budget which reflects the strategic directions of the company. The master budget states the strategies of the company which helps to achieve the specific goal. The management actions of the company are needed to achieve the budget. The discussion of headcount changes is also made with the presentation of master budget that are required to achieve the budget of the company. Master Budget is the master planning tool which is used by the company to direct the activities of the organisation as well as to analyse the performance of the various responsibility centres. It is the responsibility of the senior management team to review the master budget and incorporate the modifications until the appropriate budget which provide the specific result. The company develops the low level of budget in order to develop the master budget of the company. The company used the participative budgeting in order to reach at the final stage of budgeting (Costello, Petacchi, and Weber, 2016). The master budget of the company includes the direct labour budget, direct materials budget, production budget, sales budget, selling and administrative budget and many others. After the master budget is analysed, the accounting staff of the organisation implement the budget in order to develop the financial reports of the company and the actual results.
Sales Budget
The estimation of units in the sales as well as the estimation of earning from the sales is called the sales budget. It is the first budget which is used by the company while developing the master budget. Economic conditions, production capacity, market competition and selling expenses have to be analysed by the management while developing the sales budget. All these factors play an important role in the future performance of the company. The sales budget states the estimation of the sale and the revenue collected from these sales. The sale budget not developed to achieve the goals of the company but also provide a framework for the company wide budget. Every budget of the company is based on the sales budget that is why sales budget is the initial point for the master budget. It is necessary for the company to estimate the number of products for selling and revenue which generate from selling (Dummies, 2018).
Selling and Administrative budget
Selling and Administrative budget of the company is including the all budget of non-manufacturing departments such as sales, marketing, accounting, facilities and engineering departments. This budget of the company states the size of production budget and the considerable attention. This budget is split into the segments such as sale and marketing budget and administration budget. The information of this budget is not attained from any other budget. Manager use the different tool to analyse the activity of the company in the terms of cost and expenditure. The company uses the activity based costing analysis to evaluate the cost of the activities that which activity contain more cost and which is less as per the terms of expenditure. It is necessary for the company to estimate the activity level of cost while developing the administrative budget.
Production Budget
The financial plan that contains the number of units which is manufactured by the company is called the production budget. It is a report in which the estimation has been done in order to evaluate the number of units that a plant will produce in a period. It is necessary for the manager to prepare the production budget in order to estimate the units which will need in future period. The estimation of production units is based on the number of sale of the company. The company also use this budget as a planning tool for future production processes, and scheduling. Production manager of the company develop the production budget in order to estimate the future demands and to ensure the workflow of production time to time. The budget always states the estimated units of sales and the units of production during the period. The sales budget and manufacturing budget of the company are used to determine the revenue and expenses during the period.
Direct Labour Budget
The report which states the total direct labour cost and labour hours needed for the production is called direct labour Budget (Accounting Tools, 2018b). The budget is prepared to estimate the labour force requirement during the period. Direct Labour Budget is one of the elements of master budget. This budget is prepared after the production budget of the company because the estimation of production unit helps to estimate the labour requirement to produce the product. The estimation of direct labour budget is depends on the direct labour budget of the company. The calculation of direct labour budget includes the direct labour hours, cost per direct labour hours and many others. This budget also helps to estimate the hiring needs during the needs as per the production budget (Accounting Explained, 2018).
It is a procedure in which the top management of the company develop the budget report. A top-down approach is essential for the company to achieve the objective of the company. The senior management of the company develops the master budget on the basis of expense s pf the different departments. This budget is developed for the entire organisation and for the all department of function. Once the budget of the company is prepared by the senior management, the amount is allocated to the individual departments for the smooth functioning. It is the responsibility of those departments to take care about the budget and make the expense as per the created budget. This budget is prepared by the top management of the company, it does not include the lower level departments to develop the appropriate the budget. The lower level department is not included in this budget which helps the company to save the time. It can be said that the top-down approach is a time saving approach. Lower level people concentrate their own work and implement the budget appropriately as per the created budget which helps to achieve the objective (Carey, Knowles, and Towers-Clark, 2017).
It is a procedure in which the lower level of departments develops the budget as per their expenses. The process starts from the managers of individual departments and finish at the approval of senior management. The lower level of department creates the budget report and then sends it to the senior management for the approval. The budget is approved or either sent back for the revision and modification. After modifications of the budget, the master budget of the company is prepared from the various departments budget in order to meet the objective of the company. In this process, the senior management of the company take the decision on the basis of the lower level department budget and opinions. This approach is appropriate to develop the budget because the manager of every department shares the opinions and suggestions. The each department of the company creates their own budget due to which the understanding is increases between the departments and the lower level of managers because they are directly involved in the process (Weygandt, Kimmel, and Kieso, 2015).
These two approaches are adopted by the companies in order to develop the budget of the year. The budget of the company is prepared for every department of the company as per the expenses. The nature of approaches is similar but the procedure is different which is analysed by comparing these approaches.
|
Basis of difference |
Top-down Approaches |
Bottom-down Approaches |
|
Meaning |
It is a procedure in which the budget is prepared by senior management |
It is a procedure in which the budget is prepared by the different departments of the company |
|
Presence |
Only senior management is involved |
Senior management and the manager of the other departments is involved |
|
Time consuming |
This process is more time consuming |
Less time consuming process |
|
More beneficial |
It is beneficial but not more appropriate |
It is more appropriate because manager of departments gives opinion |
|
Interference |
Senior management makes the decision |
Senior management check the report of other departments |
|
Flexibility |
It is more flexible |
It is less flexible |
|
Large process |
It is a big process |
It is a small process |
|
Permission |
Senior management takes the all decision |
Manager of different department takes the permission from the senior management |
|
Changes |
Changes is not made due to the decision of senior manager |
Changes is made by the senior management while providing the approval on the report |
As per the above discussion, it has been seen that both the approaches is used to develop the budget for the company. But as per the comparison of the approaches and the nature of the company, bottom-down approaches is more beneficial because the opinion of every department is considered. Different department develop their own budget as per their expenses so that the appropriate budget is prepared for the smooth operation.
Each and every employees gives their suggestion as they are directly involved in the process. In Top-down approach, the only senior management takes the decision which is not appropriate sometimes because of lack of communication. That is why, Bottom-down approaches is suitable for the company to develop the budget.
|
Statement of Profit or Loss of Asaleo Care Limited |
|||
|
Particulars |
Actual |
Budgeted |
Variance |
|
30th June |
|||
|
2018 |
2019 |
||
|
$000 |
$000 |
||
|
Revenue From Continuing Operations |
|||
|
Sales of Goods |
2,67,245.00 |
2,93,969.50 |
-10% |
|
Other Revenue from ordinary activities |
245.00 |
269.50 |
-10% |
|
2,67,490.00 |
2,94,239.00 |
-10% |
|
|
Other income |
– |
– |
– |
|
Expenses |
|||
|
Cost of sale of goods |
-1,68,406.00 |
-1,81,878.48 |
-8% |
|
Other Expenses from ordinary activities |
|||
|
Distribution |
-33,912.00 |
-34,590.24 |
-2% |
|
Sales and Administration |
-29,783.00 |
-30,378.66 |
-2% |
|
Other |
-20,862.00 |
-21,279.24 |
-2% |
|
Impairment losses |
-1,39,956.00 |
-1,42,755.12 |
-2% |
|
Finance Costs |
-6,695.00 |
-6,828.90 |
-2% |
|
(Loss)/Profit before income tax |
-1,32,124.00 |
-1,23,471.64 |
7% |
|
Income tax benefit/(expenses) |
30,665.00 |
31,278.30 |
-2% |
|
(Loss)/Profit for the period |
-1,01,459.00 |
-92,193.34 |
9% |
From the above evaluation, it has been seen that the company suffered the loss in the year 2018 due to which the budget of 2019 also show the loss. Positive amount of the variance states the loss of the company. It has been seen that the revenue of the company is reduces and the expenses is increases. The company faces the loss in future due to the same situation and the chance of insolvency is increases as per the increasing expenses. The impairment loss is also increases in the coming year which states the inappropriate amount of asset. Increasing expenses is the main reason of facing loss by the company. It is observed that the selling and administrative expenses of the company is increases with the higher amount and the other expenses of the company is too increases which states the negative results in future. The revenue of the company is less than the expenses of the company due to which the every amount of variance shows the negative result. As per the above statement, it can be said that the company will not survive for long time in the market due to increasing loss in every year (Asaleo Care, 2018).
The company has to reduce the expenses and put their efforts in order to increase the revenue. Increasing revenue is beneficial for the company because more investors attain to invest in the organisation. But if the company suffers from the loss then it face the issues in the future. The Company has to increase its sale by increasing the purchasing units in the future in order to earn the high revenue. The main aim of preparing the master budget is to achieve the goal and objectives. The company has to prepare the budget by analysing the previous report. The company should adopt the strategies as per their expenses budget so that the sales of the company increase with the decreasing amount of expenses (Tellermate, 2018).
Conclusion
From the above discussion, it has been concluded the company has to develop the budget in order to achieve the objective. Master Budget is prepared by the company with the help of all lower level of budgets. There are many elements of master budget such as production budget, sales budget, selling and administrative budget, direct labour budget and many others. The company has to prepare the budget before implementing any strategies in the organisation. There are two approaches of developing the budget and these are top and bottom approaches. The both approaches are used to develop the budget of the company but bottom-down approaches is more suitable for the organisation. In this report, the Income statement budget is made as per the income statement of 2018 of the company. By comparing the data of the company, it has been seen that it face loss in the year 2019 due to increasing expenses more than the revenue. The chance of insolvency is increases for the company due to increasing loss. The company has to focus on their sales in order to increases the revenue and it also has to prepare the budget so that the expenses is reduces. The company will grow in the future by reducing the expenses and increasing the revenue.
References
Accounting Explained. (2018) Direct Labour Budget. [online] Available from: https://accountingexplained.com/managerial/master-budget/direct-labor [Accessed 2/2/19].
Accounting Tools. (2018b) Direct labour budget. [online] Available from: https://www.accountingtools.com/articles/2017/5/17/direct-labor-budget [Accessed 2/2/19].
Accounting Tools. (2018a) Master Budget. [online] Available from: https://www.accountingtools.com/articles/2017/5/14/master-budget [Accessed 2/2/19].
Asaleo Care. (2018) About Asaleo Care. [online] Available from: https://www.asaleocare.com/about-us/ [Accessed 2/2/19].
Asaleo Care. (2018) Half Year Report. [online] Available from: file:///C:/Users/SYSTEM~1/AppData/Local/Temp/636847371109342000.pdf [Accessed 2/2/19].
Carey, M., Knowles, C. and Towers-Clark, J. (2017) Accounting: a smart approach. Oxford University Press.
Costello, A.M., Petacchi, R. and Weber, J.P. (2016) The Impact of Balanced Budget Restrictions on States’ Fiscal Actions. The Accounting Review, 92(1), pp.51-71.
Dummies. (2018) Elements that Go Into Creating a Master Budget. [online] Available from: https://www.dummies.com/business/operations-management/elements-that-go-into-creating-a-master-budget/ [Accessed 2/2/19].
Karmakar, R. (2018) Management Accounting: Meaning, Functions and Characteristics. [online] Available from: https://www.yourarticlelibrary.com/management-accounting-2/meaning/management-accounting-meaning-functions-and-characteristics/65345 [Accessed 2/2/19].
Shields, M.D. (2015) Established management accounting knowledge. Journal of Management Accounting Research, 27(1), pp.123-132.
Smartsheet. (2018) The Purposes of Top-Down and Bottom-Up Management Styles. [online] Available from: https://www.smartsheet.com/top-down-bottom-up-approach [Accessed 2/2/19].
Tellermate. (2018) 5 ideas for reducing cash loss in your business. [online] Available from: https://www.tellermate.com/news-and-resources/5-ideas-reducing-cash-loss-business/ [Accessed 2/2/19].
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015) Financial & managerial accounting. John Wiley & Sons.
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