Managerial Accounting: Evaluating Financial Performance and Future Projections of A2 Milk Company Limited

In this document we will discuss about Managerial Accounting and below are the summary points of this document:- The report evaluates the financial performance of A2 Milk Company Limited for 2018 and predicts future performance based on assumptions made by the organization. Adequate marketing techniques are identified as crucial for the company to meet its budgeted income target and increase product demand. The projected income statement is deemed suitable for the organization, but it is important to develop it based on relevant growth observed in the past accounting year.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
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Executive Summary:
The report has focused on evaluating the financial performance of the A2 Milk Company
Limited for 2018 along with anticipating future performance depending on a number of
assumptions made by the organisation. It is an ASX listed organisation producing milk and other
dairy products operating in Australia and New Zealand. By enforcing adequate marketing
techniques, the A2 Milk Limited Company Limited has the ability of meeting the budgeted
income target by increasing its product demand in the market. The increase in overall sales of
the firm is critical, since the management could generate the adequate cash flows to meet its
expenses and outflows. The projected income statement of the A2 Milk Limited Company
Limited is found to be suitable for the organisation in comparison to the financial performance
in 2018. However, it is to be noted that the generated budgeted figures are not in tandem with
the income statement prepared by the organisation in 2018. Therefore, it is crucial to develop
the budgeted income statement depending on relevant growth observed in the past accounting
year.

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Table of Contentss
Introduction:....................................................................................................................................3
Part a:...............................................................................................................................................4
Part b:...............................................................................................................................................8
Part c:.............................................................................................................................................11
Part d:............................................................................................................................................13
Conclusion:....................................................................................................................................14
References:....................................................................................................................................16

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Introduction:
The report has focused on evaluating the financial performance of the A2 Milk Company
Limited for 2018 along with anticipating future performance depending on a number of
assumptions made by the organisation. It is an ASX listed organisation producing milk and other
dairy products operating in Australia and New Zealand (The a2 Milk Company 2019). In
addition, a detailed discussion of the top-down and bottom-up approaches to the budget
process is made in this paper. Furthermore, the income statement for 2019 has been
estimated, which could help in determining the future income of the firm. Adequate analysis of
the components of master budget is conducted for determining the impact on the overall
financial performance of the organisation. The analysis of the components of master budget
assists the management to identify income and expenses, which is anticipated to carry out the
business operations in future. By assessing the projected income statement, it would help in
adopting suitable measures for the organisation for generating the desired level of income.
Finally, the report covers comparison of the actual income statement of 2018 with the
budgeted income statement of 2019 for the A2 Milk Company Limited.

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Part a:
Figure 1: Components of the master budget
(Source: Balakrishnan, Labro and Soderstrom 2014)
With the help of the above figure, the different components of the master budget are
represented, which a firm uses to prepare budgets for the respective periods. These
components primarily assist the management to acquire the required level of income from
operations and this has reduced the probability of occurrence of variance from the budgeted
sales figure to actual sales figure (Bandy 2014). Moreover, the components of budget direct
help the organisation in setting up relevant expenses and income, which would be derived from
business operations over the period. As pointed out by Banker and Byzalov (2014), master
budget would assist the organisation to derive high level of income from business operations,
which could enhance the overall efficiency of the management. The master budget would help
in obtaining the needed level of funds for supporting the master budget and due to this; there

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would be significant improvements in the entire business operations. The master budget
consists of a number of components, which are described as follows:
Sales budget:
This is the initial element of the master budget, which allows the organisation to detect
the level of selling units to be incurred from operations. The selling price per unit and number
of units sold are estimated for the upcoming quarters or periods in sales budget. Moreover, the
values included in the sales budget are identified from the previous growth in selling figures,
which are derived by the firm. The sales budget exercises direct impact on the components of
the master budget, as rise in selling units would have effect on the expenses and production
needs of the firm (Barr and McClellan 2018).
Production budget:
The main reason behind the use of production budget by the organisation is that they
could detect the estimated level of production, which is needed to be conducted by the
management so that they could support the overall product demand (Bhalla 2014). In addition,
the production budget provides enhanced value to the organisation to determine the
requirement of raw materials along with other purchases, which are needed for ensuring
smooth flow of business operations. The production budget ascertains the companies in
determining the activity levels, which would be needed for supporting sales demand from the
customers (Chenhall and Moers 2015).
Cash budget:

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The cash budget is mainly prepared with the intent of determining the income and
expense levels expected to be derived from operations. The cash budget assists in representing
the cash position which the firm would derive in the accounting year. The cash budget is
prepared after the sales and production budget are prepared, which would assist the
management to determine the overall cash flows expected to occur from a particular
timeframe.
Direct labour budget:
The direct labour budget would be affected directly by the sales budget expected to be
derived from the firm. The rising level of output, which is needed by the sales budget, would
exercise direct influence on the direct labour requirements in the production system (Cokins
2014). Hence, direct labour budget assists the firms in determining the staff levels needed in
the production function for helping the production results along with compliance to the sales
budget. The direct labour budget is made after the preparation of production units and this
determines the level of labour input needed for the upcoming period (Finkler, Smith and
Calabrese 2019).
Direct materials budget:
After production budget and sales budget are prepared, an organisation prepares its
direct materials budget, which help in determining the level of materials needed in order to
support sales demand from the customers. In addition to this, the direct materials budget
would aid in determining the expense level adequately needed by the organisation in order to
enhance its production needs. Furthermore, the direct materials budget would help in

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providing an overview of the material needs after the analysis of inventory currently held for
production (Karadag 2015).
Factory overhead budget:
By using this budget, the firm could obtain an insight of the factory expenses, which it
has to spend besides costs related to direct labour and direct materials. The information
included in the cost of budget has direct relationship with the cost of sales of the firm. This
would help in determining the level of expenses, which is necessary for the form to incur in
order to provide adequate support to the future selling units. The factory overhead budget is
considered to be beneficial in nature, as it takes into account a huge portion of expenses, which
the company has to incur so that it could accommodate the estimated sales (Kotas 2014).
Selling and administrative expense budget:
For evaluating the estimated operating expenses, the managers of any organisation use
this budget along with other manufacturing expenses incurred in the accounting year. In
addition, this evaluation helps the organisation to determine the selling and administrative
expenses needed to be understood by the organisation for providing its adequate support to its
future operations. By computing these expenses, the level of spending could be determined
and it is needed to be understood by the organisation so that its operations could be supported
in the accounting year through analysis of the outcomes (Lavia López and Hiebl 2014).
Budgeted financial statements:

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The budgeted financial statements are to be prepared by the firm after the
aforementioned components of the master budget are prepared effectively. The reason is that
they assist in preparing the balance sheet and income statement for the accounting year
(Melitski and Manoharan 2014). In addition, with the help of budgeted financial statements,
the company could determine the projected incomes expected to be earned over the upcoming
accounting periods. Due to this, the income and expense levels could be determined in the
accounting period.
Part b:
It is critical to engage various business units when there is preparation of a
comprehensive budget. This mandates the requirement of all unit representatives to participate
in the budget development process appropriately. Normally, a budget committee is present to
look after the process, which comprises of some top level executives of the organisation
(Menifield 2017). These personnel offer valuable judgements about the aspects having
association with sales, financing, production and other operating stages. Along with these, the
position of these individuals needs to be proper so that they could provide better information
to their concerned units along with advice on resource needs and opportunities.
There are a number of differences that could be noticed between top-down budget
approach and bottom-up budget approach that the firms could utilise for the preparation of
budgets. In addition, the comparison would help in detecting the suitable budgeting process,
which the organisations could utilise for preparing budget so that its business operations could
be supported adequately. The two above-stated approaches are mainly used in different

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business areas that aid the management in the process of decision making regarding its future
operational activities. By using the top-down approach to the budget process, both specific and
general perspectives could be used for evaluating a particular scenario. On the other hand, the
bottom-up approach to the budget process focuses on specific conditions after which it is
shifted to basic features. In addition to this, a particular variation is evident between top-down
budget approach and bottom-up approach of the process of budget, which signifies the
alternative measures undertaken on the part of each process (Miller 2018).
The management of an organisation mainly uses the top-down approach to the budget
process for preventing the budget holders in obtaining an opportunity to involve in the budget
process. Along with this, the top level management provides direct assistance in preparing the
budget. In this case, there has been adequate allocation of resources, which is conducted by
complying with the approval of the top officials. The firm is not engaged to utilise department
heads in this process for determining the budgeted values. With the help of top-down budget
approach, the managers could formulate the budget falling with the limits of the desired
budgeted values. This type of approach is highly advantageous that assists in reducing the lead
time in order to ensure completion of the manufacturing process. This is because the top level
management of an organisation bears the obligation of developing the required budgets. As a
result, it would lead to saving additional time, which could reduce the efforts of the individuals
accountable to conduct day-to-day business operations (Miller-Nobles, Mattison and
Matsumura 2016).

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However, this budget approach suffers from a number of drawbacks. One of such
drawbacks includes the non-involvement of the persons detecting the specific expenses, which
could take place while carrying out daily business operations. Due to this, the budget would be
unable to cover up the expectations, as the top individuals would not take into consideration
the expenses to be incurred across the various departments (Noreen, Brewer and Garrison
2014).
The bottom-up approach to the budget process could be defined as a method where
there is chance for the budget holders to be involved in their own budgets. This procedure
seems to have direct involvement with the managers of the departments in order to prepare
the budget in tandem with the requirements and expenses. This approach is considered to be
highly valuable, as the estimated expenses could be accommodated appropriately within the
budget. On the other hand, the bottom-up approach to the budget process suffers from various
limitations, since the expenditures would be handled because of the increased spending target
of the departments. Therefore, the bottom-up approach to the budget process would help in
raising the level of expenses, which is needed for all the departments. The reason is that the
budget would take into account the expenditure requirements of all relevant managers
associated with the departments (Parker and Fleischman 2017).
For both the budgeting approaches, there have been different advantages and
drawbacks, which are observed to have adverse impact on the prepared budgets of the
business entities. By considering all these aspects, the A2 Milk Company Limited would become
beneficial by implementing the top-down approach to the budget process, as the budgets could

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be developed by the organisation in order to support its future operations. Along with this, this
approach would assist the concerned firm in preparing the needed income and expense levels
to be earned and spent in a specific accounting period.
Part c:
Table 1: Budgeted income statement of the A2 Milk Company Limited for 2019
(Source: Thea2milkcompany.com 2019)
The above table mainly assists in depicting the estimated income statement of the A2
Milk Company Limited for 2019 by using the financial data of 2018. This has aided in detecting
the income and expense levels, which would be spent in the later financial period. For
preparing the budgeted income statement of the organisation, certain assumptions are made
that are undernoted:

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There would be an increase in sales by 10%, while the cost of sales is forecasted to
increase by 8%.
The operating expenses of the organisation are projected to increase by 2% in 2019.
It is assumed that the organisation would not earn any interest income and other
revenue in 2019
After analysing the above table, it is clear that there has been improvement in the
financial performance as evident from gross margin, operating profit and net profit in 2019. The
estimations are carried out by based on the incremental sales and expenses, which would be
spent in the specific year (Rogulenko et al. 2016). Hence, by using this budget procedure, the
A2 Milk Company Limited could obtain control of the whole income and expenditure scenario
estimated to be generated in the upcoming period.
In addition to this, the above table clearly signifies the fact that the relevant increase in
total sales of the firm is estimated at 10% owing to which increase in total sales could be
observed in 2019. Due to such increase, improvement could be observed in the gross margin of
the A2 Milk Company Limited as well. On the other hand, there would be rise in cost of sales as
well by 8%; however, the rise in revenue would offset such increase in cost of goods sold in
2019. Moreover, the operating expenses are forecasted to increase by 2% and despite such
rise, the operating profit is found to be higher compared to 2018 owing to increased gross
margin in 2019. The evaluation of financial performance could be conducted by using the above
table coupled with the determination of income level to be derived from operations. In this
regard, Sandalgaard and Nikolaj Bukh (2014) stated that budgets are prepared by considering a

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number of assumptions, as it allows the organisation to detect the upcoming operating needs
needed to be met by the management.
By enforcing adequate marketing techniques, the A2 Milk Limited Company Limited has
the ability of meeting the budgeted income target by increasing its product demand in the
market. The increase in overall sales of the firm is critical, since the management could
generate the adequate cash flows to meet its expenses and outflows (Van Dooren, Bouckaert
and Halligan 2015). The projected income statement of the A2 Milk Limited Company Limited is
found to be suitable for the organisation in comparison to the financial performance in 2018. As
commented by Segun and Olamide (2015), if the A2 Milk Limited Company Limited fails to
conduct proper research before the preparation of the master budget, the procedure could
exercise negative impact on its business functions and activities.
Part d:
From the above table, it could be observed that the projected income statement of the
A2 Milk Company Limited is prepared by taking into consideration a number of estimations by
using the actual data of 2018. By carefully analysing the same, it has been observed that there
is considerable increase in overall income in the budget of 2019 because sales revenue would
increase by 10%. In addition, this increase in sales has raised the overall revenue to $1,014,589
in 2019 from $922,354 in 2018. The main reason that the sales revenue has increased for the
organisation is due to the estimation that there would be overall rise in sales by 10% in 2019.
On the other hand, there has been rise in cost of sales from $458,005 in 2018 to $494,645 in

14MANAGERIAL ACCOUNTING
2019. However, this rise is offset by total increase in sales revenue due to which increase in
gross margin could be observed from $464,349 in 2018 to $519,944 in 2019.
As per the annual report of the A2 Milk Company Limited in 2018, it contains certain line
items of expenses and the budgeted income statement of the organisation contains the same
items as well. These expenses are listed down as follows:
 Distribution expenses
 Administrative expenses
 Marketing expenses
 Other expenses
 Finance costs
This denotes that the changes in the budgeted values are overinflated due to which
considerable rise in net profit of the organisation could be observed in 2019. This is because
even though there would be increase in cost of sales and other related expenses of the A2 Milk
Company Limited, it would be offset by sufficient increase in sales revenue. This clearly denotes
that the generated budgeted figures are not in tandem with the income statement prepared by
the organisation in 2018. Therefore, it is crucial to develop the budgeted income statement
depending on relevant growth observed in the past accounting year (Wang 2014).
Conclusion:
From the above discussion, it is clear that the different components of the master
budget are represented, which a firm uses to prepare budgets for the respective periods. These
components primarily assist the management to acquire the required level of income from

15MANAGERIAL ACCOUNTING
operations and this has reduced the probability of occurrence of variance from the budgeted
sales figure to actual sales figure. The A2 Milk Company Limited would become beneficial by
implementing the top-down approach to the budget process, as the budgets could be
developed by the organisation in order to support its future operations. Along with this, this
approach would assist the concerned firm in preparing the needed income and expense levels
to be earned and spent in a specific accounting period.
By enforcing adequate marketing techniques, the A2 Milk Limited Company Limited has
the ability of meeting the budgeted income target by increasing its product demand in the
market. The increase in overall sales of the firm is critical, since the management could
generate the adequate cash flows to meet its expenses and outflows. The projected income
statement of the A2 Milk Limited Company Limited is found to be suitable for the organisation
in comparison to the financial performance in 2018. However, it is to be noted that the
generated budgeted figures are not in tandem with the income statement prepared by the
organisation in 2018. Therefore, it is crucial to develop the budgeted income statement
depending on relevant growth observed in the past accounting year.

16MANAGERIAL ACCOUNTING
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