The aim of the report is to understand the concept of the budgeted income statement of the selected ASX listed company which include the National Australia Bank. An income statement for the business reports about its earning and expenditures for the set period of time that can be naturally by the month, quarter or for a year. An accounted income announcement is basically a prediction related to the income statement for the future. The report includes the explanation of the elements related to the master budget that might be used by the company while managing their operations. It also includes the discussion related to the comparison of top-down and bottom-up approach that is present in the budget process. The analysis related to the suitability of the approach for the company is discussed in the report. Moreover, based on the 2018 Annual Report a budgeted income statement for 2019 is prepared with the motive to compare the variance and changes.
National Australia Bank (NAB) is considered as one of the fourth largest monetary institutions that are performing their business operation in Australia in terms of the marketplace capitalisation, earning and customers. The bank is able to maintain the 21st ranking in the work in terms of the market capitalisation. The bank is currently operating their business operations through approx. 1590 branches and service centres with approx. 4,421 ATMs across Australia, New Zealand and Asia were the bank is serving to more than 12.7 million customers according to the data till 2014. At the present time, the company have more than 30,000 people where they are serving more than 9,000,000 customers at more than 900 locations (National Australian Bank, 2018). The company is funding to the important infrastructure in the communities which majorly include schools, hospitals and roads.
A master budget is one of the plans that are formed with the motive to manage the manufacturing and sales activity of the company with the motive to meet or achieve the profit and cash flow goods. The master budget preparation by the organisation needs careful coordination of the different budgets that cover in all the parts of the organisation (Ashe-Edmunds, 2018). Thus, this has been found master budget is one of the realistic but not complacent budgets. The major mechanisms of the master budget majorly include income and expenses, overhead and production costs and the monthly, annual, average and projection totals. Some of elements of the master budget are discussed below: –
Sales budget plays a vital role in the formulation of the master budget as it is the straight result of the sales prediction which is grounded on the deliberation of the demand and supply situation, competition, future prediction of sales, past sales trends and some of the periodic changes that create the impact on sales and so on (Cox, 2010). The forecasting of the sales related to the company depends on the different factors which majorly include the population trends, general economic environment, the purchasing power of the consumers, disposable income, inflation rate and the public trends of the product and many others (Accounting tools, 2018). Most of the companies make use of the sales budget to set the departmental goals, estimated earning with the predicted production needs and requirements. The sales budget creates an impact on both the operating master budgets and the overall master budget of the company.
The production budget is another important element of the master budget which is required to be prepared by the company for the computation of the master budget. The production budget includes the planning or prediction of the future manufacturing operations that are majorly based on the forecasting of the sales with the sales budget (Trotman & Carson, 2018). The aim of the production budget is to obtain the maximum consumption of the manufacturing approaches and services. The production financial plan is majorly equipped in two parts, in which one of it is the manufacture volume budget and another budget is prepared which majorly include the cost of manufacturing.
Thus, it is found that the production volume budget is linked with the products related to the physical units and it involves planning related to the production of the goods and services. It has been found that the production budget transactions with all the budgets attributable to the production of the product.
The budget of the capital expenditure is considered as the budget plan that has been prepared for the long term investment due to which it majorly include the expenditure estimation for the new plants and equipment’s, foremost installation, replacement related to the present equipment’s, renovation of the building and many others. All these budgets are typically considered as the substantial expenditure in terms of both duration and magnitude (Gitman, Juchau & Flanagan, 2015). Capital budgeting is considered as the part of long term planning which includes different well defines a phase of the programs which is known as milestones. Every stage is being planned for the time, cost and efforts in a self-controlled method.
The direct material budget is used with the motive to calculate the material that is must be purchased in the set time period with the motive to fulfil the needs of the production budgets. The companies who majorly sell the product maintain this budget which includes all the cost that is faced by the company (Chand, 2018). This budget support in finding out the high or low cash is required by the company to make the purchase of the materials. Thus, this budget contributes while preparing the master budget.
Direct labour budget is another important element of the master budget. It is majorly used by the company with the motive to compute the figure of labour houses which will be required to create the units detailed in the budget (Wildavsky, 2017). This has been found that the computation of the direct labour budget is essential for the estimation of the number of personnel who will be required for the industrial area during the course of the budgeted period.
Manufacturing overhead budget comprises entire cost that is linked to the production other than the cost of direct labour and material. In the master budget, the material about the manufacturing overhead budget converts the part of the COGS the thing in the master budget (Bragg, 2014). Thus, this shows that this budget contributes effectively in preparing the master budget.
This budget is incorporation of reserves of all non-manufacturing sectors which comprise of sales, services departments and book-keeping. This budget is majorly prepared by the company wither on monthly or quarterly basis. This budget spilt into the segments for the purpose of the separate marketing and sales budget with a distinct administrative budget (Accounting tools, 2018). The details or information in this budget is not directly linked or derived from any other budgets. Moreover, this has been found that the master budget profit and loss statement consist of expenses with the sales revenue, cost of goods sold with the other expenses like depreciation and interest.
Cash budget shows the forecasting related to the cash inflows and outflows that is linked to business in the set time frame. Thus, this has been found cash budget is used to measure whether the entity is equipped with sufficient cash which is must to operate the business operations (Noreen, Brewer & Garrison, 2014). This has been found that in the cash budget the company make use of the sales and production forecasting to form a cash budget with the assumptions that are required for spending accounts receivable. If the company is not capable to effectively maintain the liquidity in the marketplace then it will affect the operations. It is must for the company then to increase the wealth by allotting the stock or taking on debt.
Budgeted financial statements prediction is incomplete without the estimation of income level and balance sheet of company. This has been found that budget material is taken over into the budget field for each line item in statement within the accounting software of the company (Pilbeam, 2018). These predictions are considered as the important as it plays a vital role in the estimation of the master budget by the company.
In the present scenario, this has been found that there are different types of the budgeting approach which can be used by the company in their process of the budget. Out of which, two approaches are top-down and bottom-up approach. These approaches vary from each other and the comparisons between the approaches are discussed below: –
The top-down approach is a budgeting approach in which senior management enhance a high-level budget for company. In company, once the top-level statistics are formed, the accounts are allocated to the separable department which includes the formation of the detailed budget with their allocation. In the business, the approach of top-down consists of senior management team who prepare the budget for every department in organisation (Braun, 2017). After preparing the budget for the entire organisation, the amounts get allocated to the different individual departments as these departments take those amounts and to form their personal equivalent funds within the boundaries of the management level formed budget.
Advantages: – The advantages of top-down budgeting include the executive team with the involvement of lower management doesn’t have to take the time to form budget. This approach helps the company in saving the time for individual employees who are majorly involved in the day-to-day rather than the total approach for the company (Kapinos & Mitnik, 2016). Further, the advantage of this approach is that decision can be taken by the company more quickly as compared it to the other approaches.
Disadvantages: – The disadvantages of the top-down approach is for the employees of the company who may not be involved with day-to-day which makes the other may not be conscious of detailed expenditures which are mandatory to be known by the employees of the company (Duttweiler, 2011). Thus, these lead to the issues for the departments that are majorly looking for the resource that doesn’t fit into the top-down budget. Another major disadvantage of the top down approach is that top level management needs the adequate skills so that they can prepare the budget effectively. The lack of skills can affect the budget and will misguide the employees towards the goals of company.
The approach of the bottom up is used by the company for the budgeting of the company. The process in the approach starts in the separate subdivisions where the manager forms a budget and then sends it upwards for the endorsement. Further, the budget is permitted, studied or sent back with the motive of the modification and a master budget is formed from different department’s formations (Chernyatina, Guzenko & Strelkov, 2015). Thus, this has been found that these types of budgeting work in contrast to the top-down budgeting. In other words, this has been found that the process initiates with the process that begins in the individual departments where the managers of the company form the budget and send the same for the approval from the top level management.
Advantages: – The bottom-up budgeting offers different advantages which computation of more accurate figures that improve the morale because of the capability to participate in the process of the budgeting. In this, the major advantage is that the communication and commitment are done on behalf of the administrators as they directly get indulge in the process of budget forming. Its biggest advantage is that the budget is prepared by the employees who are familiar about every department which leads to the rise in the understanding of the employees within the company.
Disadvantages: – There are different disadvantages that are involved in the process which majorly include cost overruns, over-budgeting and the deficiency of management control over the process with their spending (Weygandt, Kimmel & Kieso, 2015). The issues which might create an impact on the organisation are that the managers and employee will focus on their respective departments instead of the corporate objectives. Though, the motive of the employees and their manager should be to meet the organisation goals instead of departmental goals.
From the above discussion, this can be concluded that the National Australian bank should adopt the bottom top approach because the company is performing its business operations in different areas due to which they have many departments who are performing their work at different locations. This is the reason it has been suggested to the National Australian Bank to apply this approach for the process of budgeting. Moreover, it has been found that the use of this approach will provide the advantage to the employees as they will learn the way of proper allocation of the resources for the accomplishment of the organisation goals and objectives (Warren, Reeve & Duchac, 2013). In addition, the separate budget of the departments will reduce the complications which might be faced by the employees of the company while making the use of the Top-down approach.
This section comprises of the predicted income statement of the company for the year 2019. The changes that are reflected in the budgeted income statement are stated below: –
The variance between the actual and budgeted income statement has been reflected so the impact on the total expenses and the revenue of the company can easily be identified. The variance arises because of the difference between the actual as well in the budgeted quantity of every product that is sold by the company. The variance amount is calculated with the Standard proportion for actual– Budgeted quantity.
Income statement of National Australia Bank LTD
|
National Australia Bank LTD (NAB) |
|||
|
Income statement |
Actual |
Budgeted |
|
|
2018 |
2019 |
Variance |
|
|
$m |
$m |
||
|
Interest income |
$ 28,543.00 |
$ 31,397.30 |
-10% |
|
Interest expense |
$ (15,038.00) |
$ (16,241.04) |
-8% |
|
Net interest income |
$ 13,505.00 |
$ 15,156.26 |
-12% |
|
Other income |
$ 5,596.00 |
$ 6,155.60 |
-10% |
|
Operating expenses |
$ (9,910.00) |
$ (10,108.20) |
-2% |
|
Credit impairment charge |
$ (791.00) |
$ (806.82) |
-2% |
|
Profit before income tax |
$ 8,400.00 |
$ 10,396.84 |
-24% |
|
Income tax expense |
$ (2,455.00) |
$ (2,504.10) |
-2% |
|
Net profit for the year from continuing operations |
$ 5,945.00 |
$ 7,892.74 |
-33% |
|
Net (loss) after tax for the year from discontinued operations |
$ (388.00) |
$ (395.76) |
-2% |
|
Net profit for the year |
$ 5,557.00 |
$ 7,496.98 |
-35% |
|
Net profit attributable to non-controlling interests |
$ 3.00 |
0 |
100% |
|
Net profit attributable to owners of NAB |
$ 5,554.00 |
$ 7,496.98 |
-35% |
The major changes that are witnessed in the actual and budgeted income statement of the company are in the profit of the company. It has been found that the profit of the company will increase in the budgeted income statement for the year 2019 by 35% comparing it with the 2018 income statement. Further, it has been found that the expenses of the National Australian Bank will increase due to which the company needs to manage the funds and resources so that they can meet their expenses in the effective manner (National Australian Bank, 2018). The budgeted income statement will help the company in estimating the amount that they are willing to expand in the near future. This has been found that NAB can take help from the budgeted income statement for the estimation of the amount that they can expand in other projects and operations.
In the expected year, all the expenses are going to increase which requires the additional focus of the company with the proper allocation of the cost and resources. This helps the company in making the effective and efficient use of the resources so that the company can incur any unexpected expenses that can arise in the coming year. The variance majorly reflects that the profit of the company will help them in meeting the expenses that are incurred by the company.
Conclusion
In the end, it can be concluded that the master budget formation requires different budgets of the company which are considered as the elements of the master budget. The components of the master budget are explained with the role of sub-budget in the formation of master budget. In addition to this, it has been found that the company make use of the top-down and bottom-up approach which are compared in the report. The approach of the budgeting process which should be appropriate for the company is suggested that is a bottom-up approach. This approach helps the company in conducting their budgeting process effectively within the organisation. In the end, the income statement of the NAB is predicted with the help of the base year. The data of the base year and the budgeted year data have been compared and opinion for the projected budgeted income statement has been discussed within the report.
References
Accounting tools. (2018). Master Budget. Retrieved from: https://www.accountingtools.com/articles/2017/5/14/master-budget
Accounting tools. (2018). Selling and administrative expense budget. Retrieved from: https://www.accountingtools.com/articles/2017/5/17/selling-and-administrative-expense-budget
Ashe-Edmunds, S. (2018). Major Components of a Master Budget. Retrieved from: https://smallbusiness.chron.com/major-components-master-budget-59414.html
Bragg, S. M. (2014). Budgeting: The Comprehensive Guide. AccountingTools.
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/
Chand, S. (2018). 7 Most Important Components of a Master Budget. Retrieved from: https://www.yourarticlelibrary.com/management/7-most-important-components-of-a-master-budget/3482
Chernyatina, A. A., Guzenko, D., & Strelkov, S. V. (2015). Intermediate filament structure: the bottom-up approach. Current opinion in cell biology, 32, 65-72.
Cox, P. (2010). The Master Budget project: detailed analysis. Strategic Finance, 92(4), 62.
Duttweiler, R. (2011). Managing liquidity in banks: A top-down approach. New Jersey: John Wiley & Sons.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. AU: Pearson Higher Education.
Kapinos, P., & Mitnik, O. A. (2016). A top-down approach to stress-testing banks. Journal of Financial Services Research, 49(2-3), 229-264.
National Australian Bank. (2018). About us. Retrieved from: https://www.nab.com.au/about-us
National Australian Bank. (2018). Annual Financial Report 2018. Retrieved from: https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2018-annual-financial-report.pdf
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.
Pilbeam, K. (2018). Finance & financial markets. UK: Macmillan International Higher Education.
Trotman, K., & Carson, E. (2018). Financial accounting: an integrated approach. AU: Cengage.
Warren, C., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Chicago: Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. New Jersey: John Wiley & Sons.
Wildavsky, A. (2017). Budgeting and governing. New York: Routledge.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download