Managerial Accounting: Master Budget, Budgeting Approaches, and Case Study Analysis

The executive summary provides an overview of the report, which focuses on the elements of a master budget and compares the top-down and bottom-up budgeting approaches. Ausquest Limited, an ASX listed organisation, is used as a case study. The report includes a budgeted income statement for Ausquest Limited and recommends the top-down budgeting approach for effective business operations. The remaining sections of the report cover requirements a, b, c, and d, followed by a conclusion and references.

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 report has covered a brief description of the different elements included in a master
budget. The second segment has focused on comparing the top-down and bottom-up approach
of budgeting and accordingly, recommendations need to be provided regarding the suitability
of one particular approach for an ASX listed organisation. The income statement of Ausquest
Limited is taken into consideration for preparing the budgeted income statement so that the
cash inflows generated could be used for covering up the estimated cash outflows. By enforcing
appropriate marketing strategies, it would become easy for Ausquest Limited in achieving the
budgeted income by increasing the overall demand for its products in the market. Moreover, it
has been analysed that the successful organisations follow the top-down budgeting approach,
as it is a suitable communication tool for communicating messages to the staffs so that they
could perform accordingly. Therefore, this approach would be suitable for Ausquest Limited so
that it could conduct its business operations effectively.

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Table of Contents
Introduction:....................................................................................................................................3
Requirement a:................................................................................................................................4
Requirement b:..............................................................................................................................14
Requirement c:..............................................................................................................................18
Requirement d:..............................................................................................................................19
Conclusion:....................................................................................................................................20
References:....................................................................................................................................22

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Introduction:
Managerial accounting includes the procedures for creating reports and documents,
which would assist the management in undertaking decisions for ensuring smooth business
operations. From the perspective of the managers, it helps in identifying whether any project or
department is performing well up to the desired expectations (Alsharari, Dixon and Youssef
2015). The master budget is an aspect of managerial accounting, which is the aggregation of all
lower-level budgets produced by the different functional areas of an organisation and it takes
into consideration the budgeted financial statements, financing plan and cash forecast.
The report intends to cover a brief description of the different elements included in a
master budget. The second segment would focus on comparing the top-down and bottom-up
approach of budgeting and accordingly, recommendations need to be provided regarding the
suitability of one particular approach for an ASX listed organisation. For meeting this purpose,
Ausquest Limited is taken into consideration, which is involved in exploring and evaluating
mineral resources in Australia and Peru. The organisation explores for a group of minerals like
copper, iron oxide, zinc, gold, base metal deposits and others (Ausquest.com.au 2019).
Moreover, the third segment would involve the preparation of the budgeted income statement
of the organisation for 2019 based on the data of the income statement in 2018. Finally, the
report would emphasise on providing opinion regarding the changes in financial performance in
the year 2019.

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Requirement a:
Master budget could be defined as the strategic plan of management for the future of
the organisation (Beattie 2014). All aspects of business operations are charted and they are
documented for future estimations. Thus, with the help of master budget, the management of
an organisation could coordinate the activities related to sales, production, purchasing and
other divisions to monitor business progress along with undertaking corrective measures, if
needed. The budget is prepared annually and it is reviewed generally in each month. More
precisely, all business aspects are represented in this document. The master budget contains a
group of elements, which are elucidated briefly as follows:
Figure 1: Elements of the master budget

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(Source: Carlsson-Wall, Kraus and Lind 2015)
Sales budget:
A sales budget projects the selling volume in units and the projected earnings from the
sale of such units. A sales budget is often segregated into first, second, third and fourth quarter
estimates. The crucial components of a sales budget include projected unit sales, price per unit
and allowance for returns and discounts. The budgeted gross sales are computed by multiplying
the estimated sales per unit with the selling price per unit. For computing the budgeted net
sales, the projected sales returns and discounts are deducted from budgeted gross sales
(Boučková 2015). For preparing a sales budget, it is necessary to consider the existing economic
conditions and production capacity specific to the business. In addition, it is essential to confer
with sales staffs at different levels in various positions.
Table 1: Sales budget format
(Source: Langfield-Smith et al. 2017)
Production budget:

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The production budget computes the units of products that are required to be
manufactured and it is derived from a mix of sales forecast and the planned volume of finished
goods inventory to be in hand. This is usually identified in the form of safety stock for covering
any unexpected rise in demand (Cokins 2014). This type of budget is prepared mainly for push
manufacturing system, which is utilised in environment related to material requirements
planning. It could be extremely troublesome in developing a comprehensive production budget,
which incorporates estimation for each variation on a product that an organisation sells.
Therefore, it is necessary to aggregate the estimated information into wider product categories
having identical characteristics.
Table 2: Production budget format
(Source: Langfield-Smith et al. 2017)
Direct materials budget:

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The direct materials budget computes the materials to be purchased within specified
timeframe so that the requirements of the production budget could be fulfilled appropriately.
This budget is depicted in either quarterly or monthly format in the yearly budget (Cooper,
Ezzamel and Qu 2017). For any business organisation involved in selling products, this budget
might include maximum proportion of costs incurred by the organisation and therefore,
compliance needs to be ensured with adequate care. In opposition, the outcome might
erroneously denote excessively low or high cash needs for funding material purchases.
However, it is not possible to compute the direct materials budget for all inventory
components, as the calculation would be enormous. Thus, the managers need to either
compute the approximate inventory amount needed denoted as the sum for total inventory or
a detailed level based on the type of the commodity.
Table 3: Direct materials budget format
(Source: Langfield-Smith et al. 2017)
Direct labour budget:

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The direct labour budget is used for computing the total labour hours needed to
manufacture the units itemised in the production budget. In this context, Fullerton, Kennedy
and Widener (2014) remarked that a complex labour budget would help in computing the
number of labour hours needed along with division of information in terms of labour category.
With the help of this budget, the management of a business organisation could estimate the
number of staffs needed for the manufacturing area across the budget period. Hence, the
management could estimate hiring needs, likely overtime and layoffs. However, since
information is provided at an aggregate level, it is not used mainly for lay off and particular
hiring needs.
Table 4: Direct labour budget format
(Source: Langfield-Smith et al. 2017)
Manufacturing overhead budget:
This budget includes all manufacturing expenses except the costs relate to direct labour
and direct materials, which are itemised distinctively in the direct labour budget and direct
materials budget. The information included in this budget becomes part of the cost of sales
item in the master budget. The information included in this budget is among the most essential

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of the different departmental budget models, as it might constitute of a large part of the overall
amount of business expenses (Herschung, Mahlendorf and Weber 2017).
Table 5: Manufacturing overhead budget format
(Source: Langfield-Smith et al. 2017)
Selling and administrative expense budget:
This budget constitutes of the budgets of all non-manufacturing departments of a
business organisation like marketing, sales, engineering, accounting and facilities departments.
In fact, this budget could rival the production budget size and therefore, it deserves significant
attention (Jack 2015). The selling and administrative expense budget is represented typically in
either quarterly or monthly format. This might be divided into segments for particular sales and
marketing budget as well as a distinctive administrative budget. Thus, the managers use the
general level related to corporate activity for ascertaining the suitable expenditure level.

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Table 6: Selling and administrative expense budget format
(Source: Langfield-Smith et al. 2017)
Finished goods budget:
The finished goods budget computes the cost of finished goods at the end of each
budgeting period. It takes into account the unit quantity of finished goods after each budget
period is completed (Klemstine and Maher 2014). However, the actual source of such
information is the production budget. The main aim of this budget is to provide the amount
related to inventory asset, which tends to appear in the budgeted balance sheet. This is then
utilised for ascertaining the amount of cash required for investing in assets. When an
organisation is monitoring closely the cash balances on ongoing basis, the finished goods
budget needs to be created along with regular updates.

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Table 7: Finished goods budget format
(Source: Langfield-Smith et al. 2017)
Cash budget:
Cash budget could be defined as a budget or plan related to expected cash
disbursements and receipts in a particular period. More specifically, the cash budget is a
projection of the cash position of an organisation in future (Jiles 2014). Thus, the management
of an organisation utilises the cash budget so that it could manage its cash flows effectively. The
management needs to ensure that they have adequate cash balance to settle its due
obligations. For instance, payroll needs to be paid in every two-week period and utilities should
be paid in each month. Hence, with the help of cash budget, the management could forecast
loopholes in the cash balance of the organisation along with correcting the issues before due
payments.

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Table 8: Cash budget format
(Source: Langfield-Smith et al. 2017)
Budgeted income statement:
A budgeted income statement is defined as a financial report, which contrasts the
budged expense and revenue figures with the actual performance numbers accomplished in the
period. The management of an organisation uses this statement for identifying the ways
through which each department and the organisation has performed during the period (Kaplan

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Atkinson 2015). At the start of each period, the management mainly sets performance goals
and budget, which they expect to be accomplished. These objectives are dependent on
performance in previous periods as well as the growth expectations of the management.
Hence, the budgeted income statement maintains track of the differences or variances
between budgeted and actual figures.
Table 9: Budgeted income statement format
(Source: Langfield-Smith et al. 2017)
Budgeted balance sheet:
Budgeted balance sheet is defined as a report, which the management of an
organisation utilises in estimating the level of equity, assets and liabilities depending on the
budget for the existing financial period (Messner 2016). More precisely, the budgeted balance
sheet represents the positions of all accounts at the end of a period; in case, the actual business
performance tallies with the budgeted estimates.

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Table 10: Budgeted balance sheet format
(Source: Langfield-Smith et al. 2017)
Requirement b:
All business segments are involved while preparing a comprehensive budget. Due to
this, the representatives from all the units are included in the budget preparation process
effectively. Generally, a budget committee possibly spearheads the process and the committee
is composed of senior-level management in an organisation (Nørreklit 2014). These individuals
provide crucial insights regarding all aspects associated with production, sales, funding and
other operating phases. Moreover, these individuals are positioned effectively to deliver the

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most suitable information in relation to their respective units and they need to provide advice
on the resource requirements and opportunities within their units.
The work of the budget committee is not over necessarily after the preparation and
approval of the budget document. The committee has to bear the responsibility of monitoring
progress continuously against the budget along with potentially suggesting mid-course
corrections. The decisions of the budget committee could have adverse effect on the fate of
particular business units in terms of available resources along with setting the benchmarks to
be used for analysing performance. Due to this, the budget committee members would
consider their tasks seriously (Otley 2015).
The construction process of budget would follow the organisational chart normally. Each
element of the organisation would be engaged in developing budget information in relation to
its unit. Such information is compiled together successively, since it is passed across the
organisation until the achievement of overall budget plan. However, beyond the compilation of
data, there has been significant variation in the ways the budgets are developed among various
organisations. Some organisations follow a mandated or top-down budget approach, while
other organisations use a participative or bottom-up budget approach (Otley 2016).
Bottom-up budget approach:
This approach is driven by engaging lower-level staffs in the process of the budget
development. The higher-level management might start the budget process with general
guidelines for budget. However, the lower-level units drive the budget development for their
units. These individual budgets are grouped and regrouped so that a divisional budget could be

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developed with mid-level executives adding their input along the way (Pavlatos and Kostakis
2015). Generally, the top management and budget committee would receive the entire plan.
Therefore, it is crucial for the budget committee to review the different elements of budget in
order to assure coordination and consistency. This might need a number of iterations of
transferring the budget to the lower levels for revision by lower units. This would assist in
reaching the final budget.
This type of budget approach is deemed to be self-imposed. Due to this, Quattrone
(2016) argued that with the help of bottom-up budget approach, it is possible to improve job
satisfaction and staff morale. Moreover, this approach assists in fostering management
philosophy, which has proven to be highly suitable for the contemporary organisations.
Furthermore, the budgets are formulated by those individuals having the appropriate
knowledge of their own particular operational areas. This would enhance the scope for an
increased accurate budget.
On the negative side, this type of approach is usually more expensive and time-
consuming in terms of development and administration. This mainly takes place due to the
iterative process required for coordination and development. Another significant drawback of
this approach is that few managers might attempt to overstate their budgets, which provide
them with additional room for inefficiency and mistakes (Shields 2015).
Top-down budget approach:
Some organisations follow top-down budgeting approach. These budgets start with
higher-level management developing parameters under which it is necessary to prepare

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budgets and the parameters could be either particular or general. Moreover, such parameters
could cover expense levels, sales goals, compensation guidelines and others. The lower-level
personnel have few inputs to develop the entire goals of the organisation. The top executives
have the shots and lower-level units are minimised essentially to conduct the primary budget
computations consistent with directives. The mid-level executives might enhance the budgeting
process by refining leadership directives, since budget information is transferred across the
organisation.
However, the lower-level managers might see the budget in the form of a dictatorial
standard. In such an environment, it is possible to foster resentment. Along with this, these
budgets could pose ethical issues, since the lower unit managers might find them in positions to
accomplish unrealistic targets for their units (Thomas 2016). However, on the positive side, this
approach helps in setting a tone for the organisation. It showcases estimated production
activity and sales, which is expected to be reached by the organisation. The successful
organisations follow this approach, as it is a suitable communication tool for communicating
messages to the staffs so that they could perform accordingly. Therefore, this approach would
be suitable for Ausquest Limited so that it could conduct its business operations effectively.

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Requirement c:
Table 11: Budgeted income statement of Ausquest Limited for 2019
(Source: Ausquest.com.au 2019)
In order to prepare the budgeted income statement for Ausquest Limited, the following
assumptions are made:
Revenue is estimated to increase by 10% in 2019
Since Ausquest Limited does not have any cost of goods sold, as it is a mining firm, the
estimation of rise in cost of goods sold by 8% could not be applied here
The expenses of the organisation are projected to rise by 2% in 2019
The corporate tax rate of 30% Australia is used to compute the tax expense by
multiplying the said rate with profit before income tax.

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It is projected that there would not be loss after tax from discontinued operations, since
it has made profit in 2018, while loss was encountered in 2017
By enforcing appropriate marketing strategies, it would become easy for Ausquest
Limited in achieving the budgeted income by increasing the overall demand for its products in
the market. The increase in overall revenue of the organisation is necessary for the generation
of adequate cash flows that would support its ongoing expenses and outflows. As per the
projected income statement of Ausquest Limited in 2019, the financial performance is deemed
to be unfavourable compared to the past year. However, it has been argued by Van Der Stede
(2015) that if considerable research is not made at the time of formulating master budget, the
business operations would be affected negatively by the budget procedure.
Requirement d:
After analysing the above table, it could be stated that Ausquest Limited would
experience a rise in overall income owing to the rise in revenue by 10%. With the help of such
increase, the organisation could generate adequate cash flows that would help in meeting its
outflows. Due to the rise of 10% in sales revenue, the overall revenue is expected to increase
from $2,156,489 in 2018 to $2,372,138 in 2019. Such increase in revenue has helped in
increasing the gross income of Ausquest Limited in 2019, since it has no cost of goods sold.
However, the increase in expenses by 2% and tax rate of 30% would minimise the overall net
income of the organisation, as it has earned income tax benefit owing to the loss suffered in the
past year.

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Therefore, the changes in the budgeted figures are overestimated, which has minimised
profit for the year of Ausquest Limited in 2019. This is because it has to incur tax expense of
30% on income before tax, while it has earned income tax benefit in 2018. Hence, the budgeted
values are not in tandem with the financial statements of the previous year. The overstated
expenses that the organisation is estimated to incur would not be able to increase the overall
net income in 2019. This has mandated the need for developing the budgeted income
statement depending upon previous growth rates.
Conclusion:
From the above discussion, it is inherent that the significance of the budget process is
discussed elaborately, which would be advantageous for the companies to use for identifying
the overall expenses and income estimated to be spent in future years. Moreover, the income
statement of Ausquest Limited is taken into consideration for preparing the budgeted income
statement so that the cash inflows generated could be used for covering up the estimated cash
outflows. By enforcing appropriate marketing strategies, it would become easy for Ausquest
Limited in achieving the budgeted income by increasing the overall demand for its products in
the market. Moreover, it has been analysed that the successful organisations follow the top-
down budgeting approach, as it is a suitable communication tool for communicating messages
to the staffs so that they could perform accordingly. Therefore, this approach would be suitable
for Ausquest Limited so that it could conduct its business operations effectively. As per the
projected income statement of Ausquest Limited in 2019, the financial performance is deemed
to be unfavourable compared to the past year owing to the fall in net income.

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