Budgeting Process and Predicted Income Statement Analysis of A.P. Eagers Limited

In this report we will discuss about accounting and below are the summaries point:- The report focuses on the budgeting process applied to A.P. Eagers Limited, an ASX listed company. It analyzes the elements of the master budget, including cash, inventory, expenses, sales, and production. The report compares top-down and bottom-up approaches to budgeting and suggests the bottom-up approach for A.P. Eagers Limited. It prepares a predicted income statement for the company and discusses changes in the income statement.  

Accounting
A.P. Eagers Limited
2/3/2019

Accounting 1
Executive Summary
The purpose of the report is to focus on the budget and its process along with the process is
applied to the real-life company. The report requires the selection of the real world, ASX listed
company due to which A.P. Eagers Limited has been selected. The findings of the report include
the detailed analysis of the master budget with the elements which are used for preparing the
budget. Along with this, the major elements which are discussed include cash budget, inventory
and expense, sales and production with the budgeted financial statement. In addition, the top-
down and bottom-up approaches comparison is done with the motive to find the most appropriate
approach for the selected company. The findings show that the bottom-up approach has been
suggested to the company according to the operations. In the end, the predicted income statement
of the ASX Company that is A.P. Eagers Limited is prepared.

Accounting 2
Contents
Introduction......................................................................................................................................3
Background of the company............................................................................................................4
Master budget elements...................................................................................................................4
Sales and production budget........................................................................................................5
Inventory and expense budget.....................................................................................................5
Cash budget.................................................................................................................................6
Budgeted financial statements.....................................................................................................6
Top-down approach and a bottom-up approach..............................................................................6
Top-down budgeting....................................................................................................................7
Bottom-up budgeting...................................................................................................................7
Comparisons of approaches.........................................................................................................8
Suitable approach.......................................................................................................................11
Budgeted Income statement of the company.................................................................................11
Changes in the income statement..............................................................................................12
Conclusion.....................................................................................................................................14
References......................................................................................................................................15

Accounting 3
Introduction
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.

Accounting 4
Background 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 elements
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: -
Sales and production budget
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

Accounting 5
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).
Inventory and expense budget
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.
Cash 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

Accounting 6
(Shcherbina and Tamulevičienė, 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.
Budgeted financial statements
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 (Yılmaz, 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.
Top-down approach and a bottom-up approach
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

Accounting 7
Top-down 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).
Bottom-up budgeting
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

Accounting 8
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.
Comparisons of approaches
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.

Accounting 9
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
involvemen
t
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

Accounting 10
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.
Suitable approach
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

Accounting 11
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.
Budgeted Income statement of the company
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
2,0
19
$ $
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 27,645.00 29,856. -8%

Accounting 12
progress 60
Raw materials and consumables purchased (3,374,157.00)
(3,644,089.5
6) -8%
Employee benefits expense (331,009.00)
(337,629.
18) -2%
Finance costs (24,598.00)
(25,089.9
6) -2%
Depreciation and amortization expense (16,651.00)
(16,984.0
2) -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)
(38,205.1
2) -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.
Changes in the income statement
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

Accounting 13
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.

Accounting 14
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.

Accounting 15
References
A.P. Eagers Limited (2018) About Us [Online]. Available from:
https://www.apeagers.com.au/apeagers-company-info/ [Accessed on 31st 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 31st
January 2018]
Accounting tools (2018) Budgeted financial statements [Online]. Available from:
https://www.accountingtools.com/articles/what-are-budgeted-financial-statements.html
[Accessed on 31st January 2018]
Accounting tools (2018). Production Budget. [Online]. Available from:
https://www.accountingtools.com/articles/2017/5/15/production-budget [Accessed on 29th
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 31st January 2018]
Braun, G. (2017) Top Down or Bottom Up Corporate Budgeting – Which One is Best?.
Retrieved from: http://www.truesky.com/top-down-or-bottom-up-corporate-budgeting-which-
one-is-best/
Chen, G.G., Weikart, L.A. and Williams, D.W. (2014) Budget tools: Financial methods in the
public sector. CQ Press.

Accounting 16
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 31st January 2018]
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010) Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Gitman, L. J., Juchau, R., and Flanagan, J. (2015). Principles of managerial finance. AU:
Pearson Higher Education.
Hilton, R.W. and Platt, D.E. (2013) Managerial accounting: creating value in a dynamic
business environment. New York: McGraw-Hill Education.
Kaplan, R.S. and Atkinson, A.A. (2015) Advanced management accounting. PHI Learning.
Noreen, E.W., Brewer, P.C. and Garrison, R.H. (2014) Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Pilbeam, K. (2018) Finance & financial markets. UK: Macmillan International Higher
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Shcherbina, G. and Tamulevičienė, D. (2016) Budget formation and implementation in
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problems and perspectives, 10(1), pp.162-176.
Trotman, K., and Carson, E. (2018). Financial accounting: an integrated approach. AU:
Cengage.

Accounting 17
Wildavsky, A. (2017) Budgeting and governing. New York: Routledge.
Yılmaz, F. (2018) Budgeting as a Tool for Sustainable Development. In Handbook of Research
on Supply Chain Management for Sustainable Development (pp. 42-60). IGI Global.