Budgeted Income Statement

This report provides a comprehensive analysis of a budgeted income statement, a financial tool that helps businesses predict future revenue and expenses. It explores the master budget, its elements, and the top-down and bottom-up budgeting approaches. The report also includes a case study of ARGO INVESTMENTS LIMITED, demonstrating the practical application of budgeting principles and the importance of aligning budgeting strategies with organizational goals.

BUDGETED INCOME
STATEMENT

Executive summary
Budgeted income statement is kind of report which contains anticipated income
and expense of a business. It is made after completion of operating budget. It is
same as other statement except it is made for upcoming year. This report will
provide understanding about income statement and its complement along with
approach used in formulating the budget I.e. top-down and bottom- up approach.
Study will help in learning the budget making. Learner will get to know how to
practically make income statement and what how to select the suitable approach
with considering relevant requirement and nature of organisation. Apart from it,
interpretation will be done ,which will help in knowing efficiency of work.

TABLE OF CONTENTS
Executive summary .........................................................................................................................2
INTRODUCTION...........................................................................................................................1
A. Master budget and its element...........................................................................................1
B. Top-down and bottom-up budget approaches...................................................................4
C. Budget and current year budget of ARGO INVESTMENTS LIMITED..........................7
d. Budgeted income for 2019.................................................................................................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13
Appendix........................................................................................................................................15

INTRODUCTION
Budgeted income statement shows predicted revenue and expenses for a given period.
Generally this period is related with near future. It is also knows as pro forma income statement.
Statement enable manager to evaluate the financial performance of business by helping them in
evaluation process. This report articulates the understanding master budget and its advantage.
Study will describe the top- bottom and bottom- up approach of budget making and suitability.
Budget income for 2019 will be made for ARGO INVESTMENTS LIMITED's on the basis of
its 2018 income statement. Lastly, suggestion and opinion will be enclosed as per the outcome.
ARGO INVESTMENTS LIMITED is second largest player in investment industry in
Austrian, which is also listed in Austrian stock exchange. It was established in 1946 with
conservative investment philosophy. Company is committed to render long term growth to its
shareholders.
A. Master budget and its element
Master budget is summary of all the lower – level budgets made by an organization. It
comprises all the key functional area like financial plan, financial statement and cash forecast. It
is an interlinking budget of sale, purchase, cost and income budget. Manager used master budget
as planning and controlling tool for different business function. Generally is a company make
this budget for monthly, quarterly and yearly basis. Operational and financial budget is merged
under this single estimation statement(McLean and Talbert, 2016). It is not necessary it contains
only digits and values in it, explanatory text can be written as well. This explanatory text
describes the ways in which master budget will help in reaching the strategic objective of
company. Major component of master budget is income, expense, production and overhead,
project's overall performance and net income and loss. Following are the key element of money
allocation statement:
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Sales Budget:
This budget forecasts sale amount and quantity in the future. Main component in sale
budget are sale price per unit, number of unit sale and discount and return allowances. Gross sale
in calculate by multiply the sale unit with total number of unit (Talib and Ismail, 2017). And, net
sale is getting by gross sale – discount. Determination on sale units are done by considering
prevailing market condition, recent economic situation, business' capacity to produce, analyse
demand and supply, past sale record, trend analysis and inflation rate.
Advantages of sale budget
 Manager changes its production activities as per sales prediction.
 Sale budget help in making strategic planning like access the requirement of resources
and their effective allocation and utilisation.
 Help in formulating different sale target and marketing team’s efforts too.
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Illustration 1: Master Budget elements
(Sources: Master budget, 2018)

Production budget
It contains all the planning regarding future production on the basis of information
rendered in sales budget. Optimum utilisation of manufacturing resources is the prime objective
of this budget making (Millar and et.al.,2016). Its major components are manufacturing volume
and their cost. Production manager calculates the number of units to be produced by making
effective combination of sale formats unit with desired inventory of finish goods in it.
Advantage of production budget
 It helps in resources planning and production cost budget. Like raw material can be
acquire from supplier in reasonable price on time, as supplier raise its prices for urgent
procurements (Kaplan and Atkinson, 2015).
 Insure the requirement level of inventory.
 Plant, machinery, resources, and labour hours can be utilised to the best extent.
Manufacturing overhead budget
This budget contains all the direct and indirect cost of production excepting labour and
raw-material. Insurance, Utilities cost, equipment, supplies of packaging material, taxes, rent and
interest are loan are some items' comes in it.
Advantages of Manufacturing overhead budget
 It renders per unit overhead cost, which can be use in determination of per unit price of
the product.
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Illustration 2: Specimen of Production budget
(Sources: Generate a Production Budget as Part of Your Master Budget, 2018)

 Generally all the overhead charges are tax deductible, which help organisation to save
money in tax.
 Overhead evaluation and controlling can be done after getting the overhead expenses
estimation.
Capital expenditure budget
It is a long term budget which include long term investment like buying new machine,
plant, building and new technology. It also aims long term expenses like renovation, replacement
and development of assets (Muda and Naibaho,2018). Capital budget required more
brainstorming as they have huge financial and non financial risk associates with them. Capital
expenditure decision are done by taken various factor into consideration, which are rate of return,
legal compliance, cash flow of investment and bottleneck of project.
 It creates sense pf responsibility and accountability in major decisions. In case manager
takes these decision without knowing its consequences and benefit, it is considered as
irresponsible decision.
 Help in make Long term strategies objectives and anticipate future cash flow.
B. Top-down and bottom-up budget approaches
Top down budget approach is a conventional method of estimation. In this approach,
higher authority of organisation make budget after analysing and reviewing various reports, data
and information. Even allocation of amount to each department, also done by top people. In
bottom- up method budget holders are allowed to make their own budget or to take participation
in budges making process(Wilson and et.al., 2016). It is generally seen that in bottom up, higher
spending are set because participators know the expenses and cost associated with production on
daily basis, where higher people are not have so much awareness about these concerns.
Business forecasting
Top down budget focuses on formulating estimate for wider and key goals like expense,
profit and sales, where in down- top, department heads develops narrower budget, which is
limited to only specific goals (Abor, 2017). Like production department include material cost,
automotive supportive accessories, leather and painting cost, where marketing team's budget
only limited to promotion, commission and market research expenses.
In top down budget, Sales and business forecast starts from wide categories, which
further broken down into limited classes. Like when prediction future the sale is doing , then
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first geographical sales revenues is review, after that regional and segment wise sale target are
analysed. Adversely, second method follow just opposite process.
(Sources: Top down budget ,2018)
Company analysis
Top bottom, macro environment is look upon while developing the budget. For instance,
as auto-mobile industry is highly sensitive to economic, technological and social factor,
executive of ARGO INVESTMENTS LIMITED Set a range of profit (not specific amount and
percentage) like 2 to 5% of profit is acceptable, because they know these elements can impact
the company's profitability (Stewart, Manges and Ward, 2015). On the other hand bottom-up has
restricted company analysis, in which employee consider dimension which affects a product or
product line.
Advantage of top to bottom approach
 It saves a lot of time, as few people are participating in decision making.
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Illustration 3: Top- down and bottom up approach

 When upper management is fully involved in budget formulation, they will also get to
know the current financial position, financial needs and overall picture.
Limitation of Top to Bottom:
 Budget made by using top to bottom might be far from ground reality because its is made
by people who do not work in actual condition.
 Departments may face problem of underfunding, which force them to perform unethical
practice like exclusion from standard budget (Sponem and Lambert, 2016).
 This approach lowers the confidence, morale and motivation of employee as, they target
and resources are forced to them. Their suggestion, issue and consent are fully ignored.
Advantage of bottom to top budget making
 Increase employees motivation, accountability and sense of responsibility as they
themselves measure and predict everything.
 Render better understanding and commitment between different departments.
 Provide relevant information to executives as participators are working in real situation
on which impact the budget(Lee and et.al., 2015).
 Senior manager can focus more on complex and strategic decision.
Limitation of bottom up budget
 In case departments head and participator are inexperience and lack of knowledge, whole
budget process become disaster.
 As so many people are involved in budget formulation information can be twist in
personal interest and conflict may arises cause of different objectives.
 Manager may set easy target to get promotion and appraisal(Nan, 2018).
 Bottom line people do not have strategic perspectives, which can create problem in
aligning the budget with organisation vision and mission.
Suitability of budget approach
Top to bottom is adopted by the organisation which are new in industry and required high
level of control over people and business activities. And, it is also fit for organisation which are
doing high technical operation (Wohlfart and.et.al., 2016). On the other hand, bottom to top are
the best for company's which render hospitality service, or to well established firm with having
sound human capital. Bottom top structure is adopted because higher authorities do not have
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knowledge of ground level. For instance, in a hotel cost of service gets changes with customer
demand. And, executives generally do not have idea of real life situation.
ARGO INVESTMENTS LIMITED is an investment firm, which has objective to render
best long term return to shareholder. Its business function required high level of awareness,
knowledge and experience of share market. And, executive of company is expert in this so,
business does not need bottom to top budgeting. ARGO Ltd has to look upon the service quality
and decent return to shareholder, If company render authority to department heads, its efficiency,
would be affected (Kroos, Verbeeten and Schabus, 2018). Apart from these companies deliver its
service in different country across the world, in such case, it can be possible that manager do not
have knowledge of different aspect which impact the budget. Macro environment significantly
affected the share price And, knowledge and analyse of macro environment is not the cup of the
tea of bottom line. It can be concluded that nature of ARGO INVESTMENTS LIMITED needed
top to bottom budget to the organisation.
C. Budget and current year budget of ARGO INVESTMENTS LIMITED
Particular 2018 ($) 2019 ($)
Dividend and distribution 229899 252888
interest 5373 5910
Other revenue 2408 2648
Total Revenue 237680 261447
Net gain on trading investment 1955 2150
Income from operating activities 239635 263597
Administration expenses 8292 8955
Finance cost - -
Profit before income tax expenses 231343 254642
Income tax expenses thereon -12425 -13674
Profit for the year 218918 240968
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Above report shown the calculation of budgeted income of ARGO INVESTMENTS
LIMITED for year 2019, on the basis of 2018 income report. As, manager decided to grow
revenue by 10%, so company's all gain is increased up-to ten percent. Like income from
dividend and distribution is $229899 in current year, but targets $252888 in near future, revenue
as interest receive is starched to $5910 from $5373. Company 's other revenue must have to cross
the $2648, then only it indicates positive result. Net gain by trading investment are 1955, which
is also taken into consideration by budget maker, and, tarted to go above the 2150.
Cost of good sold target to grow up with 8%, which is not given in ARGO INVESTMENTS
LIMITED income statement.
Cost of good sold is taken by the company who sale out inventory and tangible product. As
quoted firm comes under service industry, and this industry do not tangle good to sale out, so it
can not claim COGS. It does not mean that these companies do not have to make expenses.
Investment firm has to make management expenses like printing, travel, rent, and legal charges.
An organisation cannot treat interest on dividend as management expense. In this report this
management cost is given in the form of Administration expenses (Saarinen,2017).
Administrative expenses are enhanced by 8%. Expense in service industry are increases and
decreases with number of sales unit. For instance, the more AGRO sale its shares, the more it has
to print security certificate to the shareholder. An investment company is eligible to take rebate
on expense which are made for attracting the investment (marketing exp), but it cannot claim the
money spend on internal arrangements(Nan, 2018)
There no other expenses are given which can be enlarged by 2%. Gross profit for
organisation is determined $254642, which is get by deducting the administration exp from
Income from operating activities. Lastly, income tax (5.37%) is deducted from Profit before
income tax expenses, which render the real target profit of firm for upcoming year. 5.37 tax rate
is calculated based upon previous year given data of profit before and after tax.
d. Budgeted income for 2019
Particular Amount ($)
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Dividend and distribution 252888
interest 5910
Other revenue 2648
Total Revenue 261447
Net gain on trading investment 2150
Income from operating activities 263597
Administration expenses 8457
Finance cost -
Profit before income tax expenses 255140
Income tax expenses thereon -13701
Profit for the year 241439
Actual income statement of ARGO INVESTMENTS LIMITED for 2018
Particular 2018 in ($)
Dividend and distribution 229899
interest 5373
Other revenue 2408
Total Revenue 237680
Net gain on trading investment 1955
Income from operating activities 239635
Administration expenses 8292
Finance cost -
9

Profit before income tax expenses 231343
Income tax expenses thereon -12425
Profit for the year 218918
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ARGO INVESTMENTS LIMITED estimated budget clearly shows its capability and
growth opportunities. Company anticipated its dividend inflow $229899 for 2018, but it is
expended to $252888, it means company is receiving good return on its investment. It shows
company made good investment and portfolio for its retain earning and profit. In case
organisation want more return (Martí,2016). it should focus on smart distortion of assets,
diversification, cost and income ratio of securities, evaluation and readjustment of portfolio
periodically. Interest revenue is taken higher from previous year (Lee, Lee and Lee, 2016.). This
interest is the amount, which company get from its investment. For instance, AGRO also put its
money in various platform, like construction, automotive, infrastructure and chemical industry.
Here, firm eager to earn higher amount of interest from $5373 to $5910. By seeing the
expectation, it can be assumed that firm may be using stargates to protect the interest inflow
along with smart investment. When an individual and business infuse their money in municipal
bonds, they do not have to pay income tax on income generated by them. Long term capital like
stock and real state bond also tax favourable. Company can get IRS credit as well. These all
steps will help ARGO INVESTMENTS LIMITED to increases its interest income.
Investment company avail its revenue in the form of fee, commission, charges, duties
etc. company acquire income $2408, but for 2019 it is increases it too. This expectation for
revenue shows, manager now plan to put more efforts to enhance the sale (Naumov and Tao,
2015). May be organisation think to bring new investment product, more marketing efforts or
charge a bit higher amount from customer, these steps only can help in raised revenue. Firm has
to put some extra efforts to get extra.
Trading activities are, the function which is performed by an investment company and
bank on the behalf of its client. For instance generally, customer are not expertise in investment
practices and decision (Naranjo-Gil and et.al., 2016). They also do not have experience,
awareness and knowledge of market. In such case agents and consultant purchase and sale share
from cline's side. They earn money in the form of commission per transaction. Quoted company
aims $2150 in 2019, where it had $1955 for last year. It is an obliviously, if a company put its
efforts to more sale, it trending income will automatically grown up.
Administration expenses in investment firm is play role of cost of good sold in
manufacturing firm. Administration changes are cost of printing security paper, rent, legal fee,
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expenses on keeping and maintain the record, printing prospectuses, etc. here organisation also
increases this overhead cost from $8292 to $8955(Saranya and Kumar, 2017). Company should
not allow high variance in expenses. Sometimes, High variation shows inefficiency in operation.
For instance office rent is not impacted by sale volume, if company give higher office rent, it
renders the unfavourable decision taken by higher management regarding rent. But in hospitality
industry, these expenses has raised with sale volume (Mukherjee and et.al.,2016). Company
Adm, expense also face increment of 8%, which is possible as company has mindset of growth in
sales. Lastly company's estimated profit is also at higher side by the difference of amount $22050
(10.07%), this increased profit is result of gained marginal revenue and more sales.
Table present comparison and variance of actual and budget income statement
Particular 2018 ($) 2019 ($)
Variance
($)
Variance
%
Dividend and distribution 229899 252888 22989 10.00%
Interest 5373 5910 537 9.99%
Other revenue 2408 2648 240 9.97%
Total Revenue 237680 261447 23767 10.00%
Net gain on trading investment 1955 2150 195 9.97%
Income from operating activities 239635 263597 23962 10.00%
Administration expenses 8292 8955 663 8.00%
Finance cost - -
Profit before income tax expenses 231343 254642 23299 10.07%
Income tax expenses thereon -12425 -13674 -1249 10.05%
Profit for the year 218918 240968 22050 10.07%
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CONCLUSION
From the above study it can be summarized that budgeted income statement is an
important and powerful tools which helps manager in taking various crucial business decision
and render the best utilization of organization resources. This works as financial report which
compares the actual and desired expense and outcome. Master budget gives a glimpse about
organization overall financial condition as it gives opportunity to see operational and financial
budget together. It helps manager to take major decision with proper alignment with both
dimension like capital budget render the information of financial capacity, assets, machine, so
that manufacturing decision are taken place with available financial information. Top- down and
bottom up approach has their own advantage, disadvantage and suitability, an organization
should adopt the budgeting methodology as per its need and feature. Compression of actual and
budgeted performance help in taking corrective actions on time.
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REFERENCES
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Online
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as-part-of-your-master-budget/ >
Master budget. 2018. [Online]. Available through
<http://www.loscostos.info/cost-accounting/master-budget.html>
Top down budget .2018. [Online]. Available through
<https://corporatefinanceinstitute.com/resources/knowledge/finance/top-down-budgeting/>
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