Master Budget and Budgeting Techniques for Alpha HPA Limited

This report provides a brief overview of the different elements of master budget, compares top-down and bottom-up approach to the budget process, and develops the budgeted income statement for Alpha HPA Limited for 2019 based on the actual data disclosed in its income statement in 2018.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report would provide a brief overview of the different elements of master
budget. The second section would focus on comparing the top-down and bottom-up
approach to the budget process and accordingly, the most suitable approach for Alpha HPA
Limited would be considered. Finally, the report would shed light on developing the
budgeted income statement for the concerned organisation for 2019 based on the actual
data disclosed in its income statement in 2018. From the analysis of bottom-up and top-
down budget approaches, the elements of the master budget could be prepared so that the
future operations of the business organisations could be supported adequately. By analysing
these two approaches, the top-down budget approach is deemed to be favourable for Alpha
HPA Limited, as it would aid the management of the organisation in conducting its business
operations effectively. With the help of budgeted income statement, it becomes easy to test
whether the estimated financial outcomes of an organisation seem to be reasonable.

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Table of Contents
Introduction:..............................................................................................................................3
a. Elements of the master budget:............................................................................................3
b. Comparison of top-down and bottom-up approach to the budget process:......................13
c. Budgeted income statement for 2019 for Alpha HPA Limited:...........................................15
d. Comparison of the actual and budgeted income statements:............................................16
Conclusion:...............................................................................................................................18
References:...............................................................................................................................20

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Introduction:
In the current era, all business organisations have to incur different types of costs
and this mandates the need for forming different types of budgets in order to keep track of
the actual and estimated expenses. In this context, Armitage, Webb and Glynn (2016)
advocated that a budget is a detailed future plan, which is usually denoted in formal
quantitative terms. Thus, budgets help in communicating the plan of the management
throughout the organisation. The aspect holds good for all ASX listed organisations and in
order to meet the purpose of this report, Alpha HPA Limited is taken into consideration. It is
an ASX listed organisation, which is involved in acquisition, exploration and mineral deposits
development in Australia and Indonesia (Collerinacobalt.com.au 2019).
This report would provide a brief overview of the different elements of master
budget. The second section would focus on comparing the top-down and bottom-up
approach to the budget process and accordingly, the most suitable approach for Alpha HPA
Limited would be considered. Finally, the report would shed light on developing the
budgeted income statement for the concerned organisation for 2019 based on the actual
data disclosed in its income statement in 2018 and accordingly, the impact of the changes
owing to the projections made would be analysed.
a. Elements of the master budget:
In the words of Barr and McClellan (2018), master budget is a plan developed to
manage the manufacturing and sales activities of an organisation for fulfilling profit and cash
flow objectives. In order to develop a successful master budget, the different elements of
the master budget need to be prepared in the initial stage accurately. In this way, master

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budget is deemed to be realistic; however, it is not complacent. The master is generally
represented in either monthly or quarterly format and thus, it covers the full accounting
year of an organisation. More precisely, a master budget acts the tool of central planning
that a management team utilises in directing the activities of an organisation along with
judging the performance of various responsibility centres. It is necessary for the top
management in reviewing various iterations of the master budget along with including
modifications until a budget is arrived at for accomplishing the desired outcomes (Baiman
2014). The master budget consists of a number of elements, which are illustrated in the
form of a figure as follows:
Figure 1: Various components of the master budget
(Source: Noreen, Brewer and Garrison 2014)
The above elements in the figure are discussed briefly as follows:

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Sales budget:
The most crucial component of the master budget is deemed to be sales budget, as
it paves the path for the preparation of other elements associated with the master budget.
By multiplying the selling units with the estimated per unit price, the total sales revenue for
the period is calculated (Butler and Ghosh 2015). The influence of sales budget is either
direct or indirect on the other elements of master budge as well. This is because the overall
sales figure obtained from the sales budget is used in the form of a base figure in the
budgets of the other components such as production budgets, pro-forma income
statement, schedule of customer receipts and others. As the other master budget elements
depend on sales budget, the expected selling price per unit and volume need to be
predicted with adequate care, which mandates the employment of reliable forecast
techniques (Otley 2016). In opposition, the master budget would not be effective for control
and planning. The following format is used for sales budget:
Table 1: Format of sales budget
(Source: Horngren and Harrison 2015)
Production budget:
Production budget provides an overview to the business owners regarding the
number of units to be manufactured for meeting selling needs and ending inventory

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requirements. The needed production is ascertained by deducting the opening finished
goods inventory from the overall expected sales and planned closing inventory of the year
(Dopson and Hayes 2016). After sales budget, it is necessary to prepare production budget,
since it requires the estimated sales units from the sales budget. The following format is
used for production budget:
Table 2: Format of production budget
(Source: Horngren and Harrison 2015)
Direct materials budget:
Direct materials budget computes the quantity of material needed for meeting the
production budget, which might be either monthly or quarterly. Since the budgeted
production figure is provided by the production budget, the production budget needs to be
prepared at first for preparing the direct material purchases budget. The following format is
used for direct materials budget:

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Table 3: Format of direct materials budget
(Source: Horngren and Harrison 2015)
Direct labour budget:
Direct labour budget indicates a budget of estimated expenditures in relation to
direct labour. It assists the management in planning its labour force needs. It is deemed to
be an element of master budget, as it is developed after the preparation of production
budget (Shields 2015). This is because the budgeted production in units that the production
budget has provided acts as the starting point in direct labour budget. The following format
is used for direct labour budget:
Table 4: Format of direct labour budget
(Source: Horngren and Harrison 2015)

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Manufacturing overhead budget:
A manufacturing overhead budget indicates all cost by keeping aside direct materials
and direct labour to be incurred by an organisation or any department in an accounting
period (Finkler, Smith and Calabrese 2019). This budget is deemed to be an operational
budget included in the master budget of an organisation. It has two sections, which include
variable manufacturing costs and fixed manufacturing costs. For instance, the variable costs
mainly include fuel, electricity, suppliers and others, while the fixed costs constitute of
depreciation, rent and others planned for the period. The following format is used for
manufacturing overhead budget:
Table 5: Format of manufacturing overhead budget
(Source: Horngren and Harrison 2015)
Selling and administrative expenses budget:
It could be defined as a schedule of planned operating costs except production cost.
It is an element of master budget and all organisations irrespective of their type and nature

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prepare this budget before the budgeted income statement is prepared (Greenberg and
Wilner 2015). This budget divides expenses into selling costs and administrative costs. Both
these expenses could have variable and fixed costs. For instance, sales commission is a
variable selling expense, while sales salary is classified as fixed selling expense. In a similar
manner, depreciation on machinery is a fixed administrative expense, while utilities expense
is a variable administrative expense. With the help of activity-based costing system, selling
and administrative expenses budget could be prepared correctly, as these expenses tend to
differ with different kinds of activities. The following format is used for selling and
administrative expenses budget:
Table 6: Format of selling and administrative expenses budget
(Source: Horngren and Harrison 2015)
Ending finished goods inventory budget:
This budget is prepared for computing the cost of finished goods inventory after the
completion of each budget period. The aim of preparing this budget is to provide the
inventory amount to be included in the budgeted balance sheet, which is then used for

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ascertaining the cash required for investment in assets (Järvinen 2016). The following
format is used for ending finished goods inventory budget:
Table 7: Format of ending finished goods inventory budget
(Source: Horngren and Harrison 2015)
Cash budget:
This is a financial budget prepared for computing the expected outflows and inflows
of cash in a period and the expected cash balance as soon as the period is over. With the
help of cash budget, it becomes possible to ascertain any additional cash shortage or idle
cash estimated during the period and accordingly, the managers could conduct effective
planning (Kaplan and Atkinson 2015). The following format is used for cash budget:

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Table 8: Format of cash budget
(Source: Horngren and Harrison 2015)
Budgeted financial statements:
The statement of profit and loss and statement of financial position are included in
the budgeted financial statements. With the help of budgeted income statement, it
becomes easy to test whether the estimated financial outcomes of an organisation seem to
be reasonable. When the same is used in combination with the budgeted balance sheet,
certain scenarios are revealed, which are not financially supportable and accordingly, the
management could undertake necessary measures through alterations of the budget
assumptions. The following formats are used for budgeted income statement and budgeted
balance sheet:

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Table 9: Format of budgeted income statement
(Source: Horngren and Harrison 2015)
Table 10: Format of budgeted balance sheet
(Source: Horngren and Harrison 2015)

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b. Comparison of top-down and bottom-up approach to the budget process:
All business organisations mainly use one out of two budgeting techniques, which
include top-down and bottom-up budgeting approaches. Bottom-up approach initiates from
the lowest level in an organisation and it works its way up in formulating a budget (Khalil
and Simon 2014). On the other hand, top-down budgeting starts from the management and
it works its way down to lower-level units.
Bottom-up approach:
This process of budgeting initiates with the smallest elements of an organisation,
mainly lower-level individual projects, for collective creation of a budget for the concerned
organisation. In order to initiate the bottom-up approach of budgeting technique, it is
crucial to review the steps required for conducting an individual project along with
associating a cost to each step (Klemstine and Maher 2014). Moreover, it is necessary to
conduct market research for ascertaining costs, if the organisation has not completed a
similar project before. After this, the cost for each project needs to be added up to arrive at
the total figure. This process needs to be conducted for each organisational level. For this,
the managers on each level need to provide their inputs, which would assist them in gaining
knowledge of the cost of the projects falling under their supervision (Weygandt, Kimmel and
Kieso 2015). Therefore, for preparing the annual budget, all the monthly budgets needed to
be added up for the year.
One of the primary benefits of this technique is that this budgeting technique could
plan accurately all the phases of the project. This approach generally involves individuals of
different levels within an organisation, which is a benefit for most organisations owing to
the fact that it boosts the morale of the staffs (Krstevski and Mancheski 2016). However,

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one of the primary drawbacks of this budgeting approach is that budget could be overstated
easily. This implies that lower-level participants might ask for additional money than
required. Another drawback of this technique is that it would be easy to overlook a step in
the process, which could lead to miscalculation of the budget needs.
Top-down approach:
Even though bottom-up budgeting is more common, some government agencies and
organisations are abandoning conventional budgeting approaches for enforcing the top-
down process. This budgeting approach initiates the process by projecting the cost of
greater-level tasks within an organisation. The management has prepared the budgets and
lower-level staffs do not have adequate input in the process. The management formulates
the guidelines for the budgeting approach and guidelines are based potentially on estimated
levels of sales or expenditure (Makrygiannakis and Jack 2016).
A benefit of top-down budgeting is that it could formulate organisational principles.
For instance, if the management has budgeted estimated sales, it would motivate the staffs
to carry out in a way so that the goals are accomplished. However, this approach has a
major drawback, in which the lower-level staffs are excluded usually from the process,
which could make them feel like the imposition of a budget on them against their will. This
has the chance of weakening the morale of the staffs (Meyer and Meyer 2014).
Although both the budgeting approaches have a number of benefits as well as
drawbacks, Alpha HPA Limited is advised to use the top-down budgeting approach for
preparing the necessary budgets in order to support its business operations effectively. With

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the help of this approach, the organisation could design the needed level of income and
expenses, which could be incurred in the accounting period.
c. Budgeted income statement for 2019 for Alpha HPA Limited:
Table 11: Budgeted income statement for Alpha HPA Limited for 2019
(Source: Collerinacobalt.com.au 2019)
For preparing the budgeted income statement for Alpha HPA Limited for 2019, the
following assumptions are made:
 Sales revenue is expected to rise by 10%, as the company has no sales revenue,
other income is estimated to rise by 10%
 The company has no cost of goods sold and thus, the assumption of rise in cost of
goods sold would not be applicable in this case

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 All line items of expenses including finance expenses are projected to increase by 2%
 For computing the income tax expense, the corporate tax rate of Australia, which is
30%, is taken into consideration. However, as the organisation has suffered loss
before income tax expense, it is not possible to compute income tax expense for the
projected year.
The budgeted sales revenue could be accomplished by Alpha HPA Limited after it
implemented considerable marketing tactics for raising the overall demand of its products.
The organisation desires an expected increase in other income, since it would help the
management in acquiring the considerable cash flows to provide support to the cash
outflows. It is evident from the above table that the budgeted net income at the end of the
period is deemed to be negative for Alpha HPA Limited in 2019, which shows significant
decline its financial performance. As pointed out by Miller-Nobles, Mattison and Matsumura
(2016), the budget process could have unfavourable effect on the business operations of an
organisation in the absence of sufficient research at the time of preparing the master
budget.
d. Comparison of the actual and budgeted income statements:
By using the data from the income statement of Alpha HPA Limited in 2018, the
projected income statement for the next year has been prepared accordingly. From the
analysis, it has been found out that the net income in the budgeted income statement of
2019 has increased considerably owing to the increase of 10% in other income. Such
increase in other income has assisted in generating cash inflows so that the organisation
could cover its cash outflows or expenses (Mihăilă 2014).

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The main reason behind such rise in other income is due to the assumption made of
10% increase for preparing the budgeted income statement. However, the rise in other
expenses by 2% has resulted in further deterioration of overall operating income for the
concerned organisation. Due to this, there has been significant decline in operating profit
(loss) of the organisation from ($2,029,874) in 2018 to ($2,067,926) in 2019
(Collerinacobalt.com.au 2019). The budgeted income statement of Alpha HPA Limited
comprises of a number of expenses, which has decreased the overall cash inflows in the
year 2019. These expenses have represented relatively the rise in total cash outflows that
would be conducted during 2019 estimated in the budget. The following expenses are
inherent in case of Apha HPA Limited:
 Administration and consultant expenses
 Audit and other professional fees
 Depreciation and amortisation expenses
 Directors’ and company secretarial fees
 Exploration and evaluation expenditure- pre-licence costs
 Legal fees
 Share based payment
 Loss on sale of subsidiary
 Impairment loss- exploration and evaluation expenditure
 Finance income
 Finance expense
By considering all the above aspects, it could be stated that the entire changes in the
budgeted income statement of Alpha HPA Limited are exaggerated relatively, which has

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result in minimised net income of the organisation from ($1,834,498) in 2018 to
($1,868,643) in 2019. The income tax expense for the budgeted year of 2019 would be nil,
as the organisation has suffered loss before income tax expense in the budgeted year as
well as in the actual year. Therefore, the budgeted values generated in the above table are
definitely more than the actual figures disclosed in the budgeted financial statement of
Alpha HPA Limited in 2018. Moreover, the increased expenses that the organisation has
incurred in 2018 would not be minimised in 2018 owing to the assumption of 2% increase in
all relevant expenses. Hence, the budget is required to be prepared on pertinent growth
that is generated on the past fiscal year used on the part of the organisation (Shcherbina
and Tamulevičienė 2016).
Conclusion:
The above analysis has assisted in understanding the importance of the budgeting
process, which the organisations could utilise for identifying total income and expenses
expected to be incurred in the upcoming periods. Moreover, the financial performance of
Alpha HPA Limited is evaluated mainly for formulating the budgeted income statement,
which would provide support to the cash inflows and outflows in the next accounting
periods. Along with this, the significant elements of the master budget are discussed in this
report. It has been analysed that master budget plays a crucial role in the budget process,
since it assists the business organisations in formulating essential budgets for the upcoming
accounting periods. By using the income statement of Alpha HPA Limited in 2018, the
budgeted income statement for the organisation in 2019 has been prepared, which would
assist in identifying the relevant income and expenses for the organisation.

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From the analysis of bottom-up and top-down budget approaches, the elements of
the master budget could be prepared so that the future operations of the business
organisations could be supported adequately. By analysing these two approaches, the top-
down budget approach is deemed to be favourable for Alpha HPA Limited, as it would aid
the management of the organisation in conducting its business operations effectively. With
the help of budgeted income statement, it becomes easy to test whether the estimated
financial outcomes of an organisation seem to be reasonable. When the same is used in
combination with the budgeted balance sheet, certain scenarios are revealed, which are not
financially supportable and accordingly, the management could undertake necessary
measures through alterations of the budget assumptions. Finally, the evaluation of financial
performance has been conducted in the report, which has assisted in identifying the level of
improvements carried out by the organisation.

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