Master Budget And Comparison Of Budgeted Income Statement For ASX Listed Company

Managerial Accounting and Master Budget

The aim of the report throws the light on the concept of the managerial accounting; the term managerial accounting is a process of determining, measuring, interpreting and communicating the information to the managers with the motive to pursue the organisational goals. One of the major concepts of managerial accounting is a master budget. The report majorly begins with the concept of the master budget and the components which are majorly used by the company while preparing the master budget which are majorly segmented into the two segments. Moreover, the companies make use of the different budgeting approaches which are top-down and bottom-up approach. This has been found that every company in the competitive world plan for their activities. In the end, a budgeted income statement for 2019 for the selected ASX Company, Argent Minerals Limited. The comparison has been done between the actual and budgeted income statement of the company has been done with this opinion on changes has been given.

Argent Minerals Limited is an ASX listed Company which majorly focus on forming the wealth of the shareholders with the discovery, extraction and marketing of the previous as well as the base metal products from the Lachlan Orogen in New South Wales, Australia (Argent Mineral Limited, 2018). This area is home to country’s first discovery related to gold and total hosts world-class deposits which majorly include largest underground copper-gold mines that are present in the southern hemisphere. In the year 2014, the Argent Company announced its goal to become a leading polymetallic manufacturer with the production of approx. 1.5 million tonnes per annum with a mine life of the order of 20 years (Argent Mineral Limited, 2018). Argent’s strategy is majorly to accomplish the goals that majorly include the key elements with the exploration featuring as the key immediate driver of the growth.

The master budget is a combination of the different series of the separate but the connected sub-budgets which are related to the production and the financial goals. Every company need to complete the sub-budgets so that they can make the master budget (Butler and Ghosh, 2015). The company prepared the master budget with the company to analyse the aggregate of the company’s individual budget and to reflect the complete picture of a company’s health and financial activity. The motive of preparing the master budget by the companies is that it helps in combining the factors which majorly include sales, operating expenses, assets and income streams which allow the company to accomplish the objectives and to analyse the overall performance. This budget is majorly used by large companies with the motive to keep all the individual managers to remain aligned (Butler and Ghosh, 2015). The major components of master budget are discussed below: –

Components of Master Budget

The operational budget is the budgets of the company which majorly include sales, production, direct material costs, direct costs and cost of goods manufactured (Narayanaswamy, 2017).

• Sales budget: – The sales budget is considered as one of the major component of master budget. This budget shows the prediction of the sales units for the certain period and expected price per unit. It reflects total sales that are simply the product of predicted sales units and predicted price per unit. Sales budget impacts many of the other components of the master budget indirectly or directly (Cox, 2010). This is the reason due to which total sales figure offered by the sales budget which is used as the base figure in other component budgets.  

For example the program of receipts from customers, the production budgets, pro forma income statement and another statement.

• Production budget: – The production budget is a schedule which reflects the planned manufacturing in the units which is required to be maintained by the manufacturer in the specific period to accomplish the predicted demand for the sales as well as the deliberate finished goods inventory(Noreen, Brewer and Garrison, 2014). The formula for the same is given below: –

Scheduled production in units= Probable sales in units+ Scheduled finish inventory in the units – Opening inventory in units.  

This budget is prepared after the budget since it requires the predicted sales unit’s figure that is offered by the sales budget. It is essential to note that only a production business requires preparing the budget of manufacturing items (Pilbeam, 2018).

• Administrative and selling expense budget: – This budget is formed by the company with the planning of the operating expense and many other costs that are linked with the manufacturing of the products. It is considered one of the major component of the master budget due to which it is prepared by all the large companies. The selling and administrative expense can be divided into the fixed and the variable costs (Trotman and Carson, 2018). For instance; the sales commission and freight cost on the sales are considered as the variable selling expense whereas sales salaries are considered as the fixed selling expenses. This has been found that different variable selling and administrative expenses might vary because of the different categories of activities.

The budget related to the financial terms includes various budgets like cash, balance sheet projected, cash flows and many others.

• Cash budget: – Cash budget is considered as one of the most effective for preparing the master budget. Budget related to the cash is included as one of the most effective budget which is majorly used by the companies for the prediction of the cash payments and receipts of the company. This budget helps the company in maintaining the liquidity of the company which is essential for meeting the obligations of the company in terms of the liabilities and other essential payments (Warren, Reeve and Duchac, 2013). The company ensures that they are able to meet the need of the cash in their different business operations. Moreover, this has been found that planning of the cash and its uses is also included in the budget which is prepared by the company. The cash receipts include the amount which is received by the company in terms of the sales and also the amount spends by the company for the raw material.  
• Budgeted income statement: – The budgeted income statement comprises of entire line items that are found in a normal income statement. This budget is prepared with the help of different budget with help in maintaining accuracy (Pilbeam, 2018). This budget income statement is very useful for testing whether the probable financial result of the company seems to be practical. This budget is used by the company along with the combination with the budgeted balance sheet; it discloses the scenarios of the company in terms of the financial aspects which include assets and liabilities.

In the present era, the companies make use of the budgeting approaches which majorly include top-down and bottom-up approaches. The comparison among the approaches has been discussed in this section of the report (Braun, 2017).

A top-down approach is an approach which is majorly used by the companies with the motive to create the master budget of the entire operations of the company. In this budgeting process, the top level management takes the responsibility of preparing the combined budget. In simple words, they prepare the budget of the different department altogether. Once the budget is prepared then they allocate the budgets to the departments so that they can proceed with their targets that are assigned to them. Mostly, this has been found that this budgeting process is prepared to keep the boundaries, resources and capital of the company in the mind (Braun, 2017). The resources of the company contribute effectively in preparing the budget as the top level management is aware of the resources which they are able to maintain within the organisation.

Bottom-up approach 

A bottom-up approach is an approach which is majorly used by the companies for preparing the budgets. This budgeting helps the large companies who are performing different operations or business units under one group. In this process of the budgeting, the departments of the companies make their own budgets which majorly include their goals and targets towards the company (Freedman, 2018). The departments take the approval from the top level management of the company. The top-level management review the budget and then approve the same so that the departments can proceed with their objectives and targets. This has been found that when the departments send the budgets prepared by them for the approval then they check the funds that are required to meet the departmental goals. Thus, the approval is done by the company after checking the funds and resources that are available with the company (Hilton and Platt, 2013).

Budgeting Approaches

This analysis shows that both the budgeting approaches vary a lot and there is a difference between the both. This can easily be explained with the help of the comparison of both the approaches.

• Involvement of top-level management: – In the top-up approach, the high involvement of the higher or senior manager is present as they are one who has the responsibility of preparing or forming the master budgets. Though, on the other hand, Bottom-up approach says that the involvement of the top-level management is less as they only approve the budget which is prepared by the different departments of the company (Kaplan and Atkinson, 2015).
• Time-consuming: – The budget which is prepared by the top level management that means the approach of top-down is more time consuming because they make the master budget after reviewing each and every element for the different departments. Though, another approach says that the time consumed by the departments is less as compared to a top-down approach as every department prepare their own budget (Campbell, Datar, Kulp and Narayanan, 2018).
• Use of the historical data: – The budgeting approach of the top-down majorly depends on the use of the historical data which include the previous or past sales or revenue with the expenses of the company. This has been found that the budgets of the company majorly rely on the past data which is used for the accurate prediction. Though, another approach of the bottom-up approach doesn’t make use of the effective historical data because the departments form the budget according to their current situation and according to their targets (Malmi, 2016).
• Targets and goals: – The setting of the goals and targets is done by the senior managers in the approach of the top-down which is further allocated to the departments and then to the employees who deal with the day to day obligations. Moreover, this has been found the goals and targets which are set in this approach remain more of customer-centric and link to the organisation goals. Though, on another side, the goals and targets in the bottom-down budgeting process are prepared by the managers of the departments which also involves the employees who deal with the daily operations. This has been found that most of the targets and goals are related to the department work (Bou?ková, 2015). Thus, this is the reason due to which there is the possibility that the department’s objectives don’t fulfil the organisation goals.
• Communication issues: – This has been found that the communication issues might arise in the top-down approach while preparing the budgets as the senior managers can’t directly communicate with the employees who are performing their work at the lower level. Though, on the other hand, the bottom-up approach includes the direct communication between the department’s managers and the employees as they are the one who prepared the budget together. Thus, this can be concluded that in the top-down approach of the budgeting the employees might get confused with the targets and objectives that they have to attain.
• Employee’s skills: – In the approach of the top-down budgeting process, the employee’s skills remains the same as there is no effect on the same. Though, on the other hand, in the approach of the bottom-down, the employee’s gets involved when the department’s manager form the budgets due to which they attain the skills of managing the resources effectively and efficiently which contribute in their future (Bobryshev, et al, 2015). This is one of way due to which the employees can develop their skills in the organisation.

Argent minerals are performing the business operations effectively in the Australian market where they are facing the competition from the other companies which makes them estimate and plan effectively for their resources and investment that they are going to make in the near future. This has been found that the operations of the company face the tough competition in the market. According to this, it is found that top-down approach will be suitable for the company as this will help the company in preparing the master budget which includes the planning and estimation of operations of different departments present within the company (Horngren and Harrison, 2015). Along with this, the company will prepare the budget in the way that they don’t face the loss and can easily attain the profit because it is very difficult to attain the profit in the minerals operations.

The below given is the actual and budgeted income statement of the company which include the base year 2018 and the budgeted year as 2019 (Argent Mineral Limited, 2018).

Statements of Profit or Loss of Argent Minerals Limited
	Actual	Budgeted	Variance
Particular	2018	2019
	$	$
Continuing operations
Other income	835,715.00	919,286.50	-10%
Administration and consultants’ expenses	(695,694.00)	(709,607.88)	-2%
Depreciation	(47,326.00)	(48,272.52)	-2%
Employee and director expenses	(291,756.00)	(297,591.12)	-2%
Exploration and evaluation expenses	(1,537,773.00)	(1,568,528.46)	-2%
Operating loss before financing income	(1,736,834.00)	(1,704,713.48)	2%
Interest income	24,504.00	26,954.40	-10%
Net financing income	24,504.00	26,954.40	-10%
Loss before tax	(1,712,330.00)	(1,677,759.08)	2%
Income tax expense	–	–
The loss for the year	(1,712,330.00)	(1,677,759.08)	2%
Other comprehensive income	–	–
Total comprehensive loss for the year	(1,712,330.00)	(1,677,759.08)	2%
Note: The other income of the company is assumed as the revenue due to which it is increased by 10%.
It is assumed that the income from interest will also increase due to which it has been increased by 10%.
The cost of goods sold by the company is not available due to which there is no adjustment has been done for the same.

The comparison between the actual and budgeted income statement is reflected with the help of the variance which shows the change in the percentage. This percentage reflects the changes that might take place in the company performance and position within the market. This has been found that the increase in the revenue of the company by 10% which will increase the cash inflows of the company but on the other hand, the expenses of the company in the budgeted year are expected to increase due to which the revenue of the company will get affected. This has been found that the major change has been witnessed in the loss faced by the company. The loss in the budgeted year is less as compared to 2018. Further, according to me, the company should try to reduce the expenses which are faced by them so that they can contribute in converting their losses into the profit which is must to be attained by the company for the survival in the market. Along with this, the comparison also shows that the company is not having the appropriate funds to meet the obligation and to invest in the projects from where they can get the positive returns.

Comparison of Top-down and Bottom-up Approaches

Conclusion 

In the end, from the above analysis, this can be drawn that the report majorly focuses on the budget concept of the managerial accounting which is used by the companies. The report includes a detailed explanation of the elements of the master budget which are separated into two major categories which include operational and financial budgets. These budgets are further separated into the different sub-budgets that are majorly used by the company at the time of forming the budgets. Further, the report includes an explanation of the different approaches that are used by companies in the process of budgeting. Further, the top-down approach is suggested to the Argent Minerals Limited after considering the operations of the company. Along with this, the budgeted income statement of Argent Minerals Limited which is an ASX company has been prepared with the motive to find the differences between the actual and budgeted income statement which is prepared by the company. In end, the opinion for the changes that are found is reflected in the income statement of the company after the comparisons are stated.

References 

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Argent Mineral Limited (2018) About [Online]. Available from: https://argentminerals.com.au/about/ [Accessed on 31^st January 2019]

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