Managerial Accounting: Budgeting, Approaches & AGL Energy Ltd Analysis

This report provides a detailed analysis of budgeting in managerial accounting, focusing on the elements of a master budget and a comparison of top-down and bottom-up budgeting approaches. It discusses the application of these approaches to AGL Energy Ltd, ultimately recommending the most suitable method for the company. The report includes a budgeted income statement for AGL Energy Ltd for the financial year 2019, projecting business growth, and offers a comparative data analysis of actual and budgeted income statements for 2018 and 2019. The analysis concludes with evidence supporting the chosen budgeting approach for AGL Energy Ltd.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student
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Executive Summary:
The current report is based on understanding the concept of budget. The report would place
focus on the master budgets and the elements that are involved in the master budget. An
explanatory statement would be accompanied regarding the top down budgeting approach
and the bottom down budgeting approach and selecting the best approach for AGL Energy
Ltd as the selected company for the report. Finally, a budgeted income statement for the
financial year of 2019 would be produced to project the growth of business. A conclusive
evidence for the analysis would be presented to accompany the best suitable choice of
budgeting approach for the AGL Energy Ltd.

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Table of Contents
Introduction:...............................................................................................................................3
Explanation of Elements of Budget:..........................................................................................3
Elements of Master Budget are as follows:............................................................................4
Comparison of Top Down and Bottom Up approach to budgeting procedure:.........................8
Top Down Budgeting in AGL Energy Ltd................................................................................9
Budgeted Income Statement of AGL Energy Ltd for 2019:....................................................11
Comparative data analysis of Actual and Budgeted Income Statement for 2018 & 2019:......11
Conclusion:..............................................................................................................................12
References:...............................................................................................................................14

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Introduction:
The procedure of preparing and using budgets generally differs from company to
company. There are several important requirements in designing of budget planning and
control procedure. Budgeting acts as the means of co-ordinating the overall business
activities. While preparing the budgets there are numerous factors such as production
capacity, possibilities of sales, procurement of material and labour are balanced and co-
ordinated in a manner where all the activities are in respect of the objectives (Wildavsky,
2017). As a result of this budgeting committee is created that includes all the heads of
departments for solving a common problem. The necessity for co-ordinating the procedure of
planning is enormous.
The interrelation among the functional budgets represents that the budget cannot be
completed without referring to several others. Managers that are performing their job on day
to basis are most likely to create a better idea of what is attainable that is most likely to take
place in the upcoming period, local trading conditions (Rubin, 2015). The budget holders are
more likely inclined towards working a budget in which they are involved.
The present report is based on providing an explanation to the elements of master
budget. The report would also accompany a comparative analysis of the top down and bottom
up approach to the process of budgeting. Following the comparative analysis of the company
top down and bottom down approach the report would also provide a suitable discussion
regarding the application of either of the budgeting procedure in AGL Energy Ltd as the
chosen company for this report.
Explanation of Elements of Budget:
Master Budget

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The master budget is regarded as the aggregation of all the lower level budgets that is
produced by an organization’s numerous financial areas which also includes the budgeted
financial statements, cash forecast and financial plan. Master budget is presented typically
either on monthly or quarterly basis and generally covers the company’s entire financial year
(Brown et al., 2016). While preparing the master budget an explanatory text might be
included that provides an explanation to an organizations strategic direction and how the
master budget would help in attaining the specific goals and the actions of management that
is required to achieve the budget. The master budget also includes the discussions regarding
the changes in the headcounts that is needed to attain the budget.
As stated by Schick, (2015) master budget is viewed as the central tool of planning for
the management team that is used to direct the activities of the corporation and also judging
the performance of its numerous responsibility centres. For the senior manager’s team, it is
customary for the team to review the number of repetitions of the master budget and
incorporating the modifications till it arrives at the budget which allocates the funds for
attaining the desired goals. Optimistically, a business uses the participative budgeting to
arrive at the final budget, but may also be imposed on the organizations by the senior
management with minute input from other employees (Ho, 2018). Once the master budget is
finalized the accounting staff might enter into the accounting software procedure with the
objective that the software can provide financial reports by comparing the budgets with the
actual results.
The master budget is regarded as the plan that is created to management the
manufacturing and sales activity for meeting the profitability and cash flow goals (Hernandez
et al., 2017). Creation of master budget needs careful coordination of the numerous budgets
that covers all the parts of a firm which makes the master budget realistic but not complacent.

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Elements of Master Budget are as follows:
The master budget comprises of the following elements that are as follows;
a. Sales Budget
b. Direct Materials Budget
c. Direct Labour Budget
d. Production Budget
e. Manufacturing Overhead Budget
f. Selling and administrative budget
g. Capital acquisition budget
h. Cash Budget
i. Budgeted financial statements
Sales Budget: Sales budget provides an estimation that the sales unit along with the
estimated earnings from these sales. Budgeting is regarded as vital element for any business.
A business makes the use of sales budgets to help in development of goals, estimation of
earnings and forecasting of the production requirements. The sales budget creates an impact
on both the operating budgets and the overall master budget of an organization. Sales budget
is generally divided into quarterly estimations (Gallani et al., 2016). The critical elements of
the sales budget is the estimation of the unit of sales, price per unit and the allowance for
returns and discounts. Sales budget is often created by the management by considering the
market factors, present economic conditions and business specific production capacities.
Direct Materials Budget: The direct materials budget computes the materials that should be
purchased based on the time period, to meet the requirements of the production budget
(Downs, 2017). The production budget is presented either on the monthly basis or on the
annual basis. In the business that sells the products, the production budget may comprise of

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all the costs that is occurred by the company and must be complied with reasonable care
(Kaplan & Atkinson, 2015). Or else, the outcome obtained might erroneously reflect an
excessive higher or lower requirements of cash to fund the purchase of materials.
Production Budgets: The production budget computes the number of units of products that
should be manufactured and it is obtained from the combination of sales forecast along with
the planned quantity of finished goods inventory to have in hand. Production budget as the
element of master budget is typically prepared to push the manufacturing system that is used
in the material requirements planning situation (Langfield-Smith et al., 2017). The production
budget is classically presented in either the monthly or quarterly format.
Manufacturing Overhead Budget: The manufacturing overhead budget comprises of all the
manufacturing costs apart from the other costs of direct materials and direct labour. The
information in the manufacturing overhead budget turns out the cost of goods sold that are in
line with the master budget (Elliott, 2017). The information presented in the manufacturing
overhead budget is treated as the most important for all the department because it might
comprise of large portion of total amount of company expenses.
Selling and administrative budget: This budget comprises of all the non-manufacturing
departments namely the sales, marketing, engineering and facilities department. In the
aggregate this budget is rival to the size of the production budget and requires considerable
attention (Otley, 2016). The selling and administrative expense budget is generally presented
either in the monthly or quarterly layout. Managers use the general level of the business
activities to ascertain the necessary level of expenditure. This comprises of the activity based
costing to ascertain the activities that are most likely to be required for sales level and capital
expenditure change.

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Capital Acquisition Budget: The capital acquisition budget can be defined as the sub-set of
the capital outlay for the purpose of defence that normally consists of the two theoretical
categories. The funds that are set aside for satisfying the committed liabilities based on the
contracts signed in the earlier years and the funds that are meant for paying in relation to the
new acquisition relating to which contracts are signed in the present year (Renz, 2016). In
majority of the cases the delivery schedule of the capital assets spans for number of years. In
majority of the cases the delivery schedule of the capital assets ranges for numerous years
only the advance payment that is made during the year based on which the contract is signed
and the payment of outstanding amount is related to the pre-defined milestones and stages.
Under the capital acquisition budget if the delivery schedule is to be completed all through
the year then the contract that is signed represents the full amount that is paid for the notional
allocation of the new schemes.
Cash Budget: Cash budget forms the written statement of estimation relating to the future
cash position of the business. The budget predicts the amount of future period of cash receipts
received by the business from the future sources, cash disbursement for different purposes
and the resultant cash position usually on the monthly basis as the period of budgets develops
(Eldenburg et al., 2016). The cash budget is helpful in depicting the movement of cash where
the projected income statement offers all the sources of income to be recorded and for all the
class of expenditure that would be incurred during the stated period that shows the amount of
profit that is anticipated to be earned in the future period. The cash budget shows all the
anticipated inflow of cash together with the income and non-income sources namely the
receipts from the sale of stocks and the bonds that is received from the disposal of fixed
assets.
Budgeted Financial Statement: Budgeted financial statements might comprise of the
complete set of financial statements that includes the

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a. Income statement
b. Balance Sheet
c. Cash flow statement
d. Retained earnings statement
The budgeted financial statement is compiled from the yearly budgeting model of the
business. They are regarded as useful estimation of the financial results, financial position
and cash flow statement of the business for numerous dates in future. The budgeted financial
statement is useful in creation of new budgeting model as one can understand the impact of
adjustment to the budgeting model of the financial statements (Cooper et al., 2017). The
management team while preparing the budgeted model introduces the financial statements
that are line with the financial expectations and what the business is financially capable of
attaining.
Comparison of Top Down and Bottom Up approach to budgeting procedure:
As stated by Kihn & Ihantola, (2015) the top down approach is regarded as the
starting point in the authoritative decision. A top down budgeting procedure implies that the
binding decision on budget aggregates is undertake before assigning the budgeting
expenditure inside the aggregate. As a concrete means the top down budgeting procedure
serves as the means of decisions that are taken in the cascading manner. The level of total
expenditure is ascertained prior to the allocation amid the main policies or before setting the
sectorial ceilings for the detailed division of expenditure inside each sector.
Under the top down approach the main actors are treated as the decision makers that
are responsible for formulating the efficient statute to suit the current problems. While
incorporating the budgeting, the top down budgeting approach involves the team of senior
management for developing a higher level budget for the whole organization (Malmi, 2016).

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Upon the creation of this budget, the values are allocated to the different departments and the
departments should take those numbers must create their own corresponding budgets inside
the confines of executive level.
Under the top down budget, the executive team is only involved and the lower
management are not required to participate in the budget. This helps in saving a significant
amount of time for those that are involved in the daily business activities instead of the
overall strategies of the organization (Henderson et al., 2015). However, under the top down
approach of budgeting those that are creating budget might not be involved in the daily
activities as a result of this it might not be aware of the specific expenditure needed. This
might give rise to problems for the departments that are looking for the resources that simply
does not fit in the top down budgeting.
The bottom approach on the other hand represents the process that of starting up the
individual department where the managers form a budget and then it forwards the budget
upwards for approval. The budget is either approved or revised or the same is sent back for
modification purpose and a master budget is created for numerous departments (Macve,
2015). As a general rule, the result of the approach increases the ownership of the budget
because the employees are acquainted with every department that is creating the budget. This
helps in promoting increased understanding communications and commitment on behalf of
the managers since they are directly engaged in the budgeting procedure.
Normally, the bottom up approach would lead to higher spending targets in
comparison to the top down approach and hence the reconciliation procedure would be
needed to generate the company wide budget where all the parts are added up appropriately.

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Top Down Budgeting in AGL Energy Ltd
To apply the concept of Top Down Process in the AGL Energy the beginning point of
the preparing the budget represents the decision on the total expenditure. Instead of large
amount of individual spending, AGL Energy Ltd can aggregate expenses is ascertained with
the help of autonomous consideration relating to the size of budget (Khan, 2015). After this,
AGL Energy Ltd can allocate the total expenses to a number of vital sectors. For AGL
Energy Ltd under the top down approach the sales can be forecasted by using the wider
categories of products or components by breaking into successive narrow categories and
eventually under specific items. With the help of this method AGL Energy Ltd can approach
the factors such as sales channels, geographical regions of sales, customer categories or even
the specific customers that contributes significantly to AGL Energy Ltd sales revenue.
For AGL Energy Ltd, top down approach is more suitable for the company because it
may help in projecting the large aggregate such as GDP and the use of historical relation to
obtain the components of total namely the personal consumption expenses (Mullinova, 2016).
AGL Energy Ltd can consider the top down approach for using the macroeconomic
indicators for forecasting the total amount of sales and profit. The top down approach for
AGL Energy Ltd is more suitable in the preparation of budget where the role of finance
department may be centrally focused on establishing or monitoring the total expenses.
The division of available resources under every sector of AGL Energy Ltd can open
the door for discussion and the responsible line of departments may be provided with the
substantial freedom to propose the changes in the allocation within the organization (Dutta &
Patatoukas, 2016). The main purpose of implementing the top down budget in AGL Energy
Ltd is to introduce financial sustainability that are in consideration to the forefront of the
budgeting procedure. It can promote more informed decision for the aggregate level of
expenses to project revenue.

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The top down approach of budgeting is regarded as more suitable for the AGL Energy
Ltd because it has the potential of promoting clarity while setting priorities for the revenue
producing sector by assuring that the budget allocation comprises of constant setting of
priorities (Warren & Jones, 2018). For AGL Energy Ltd, while preparing the detailed items
which makes up the budget, there is a higher risks of losing sight for larger picture. There is
certain level of aggregation at the preliminary stages of budgeting, however AGL Energy Ltd
can allocate total expenses to some vital sectors that can help in detaching the policy issues
from the perspective of technical or operative character. Therefore, the top down procedure
for AGL Energy Ltd can result in creation of wider understanding and support the financial
policy issues amid the decision makers.
Budgeted Income Statement of AGL Energy Ltd for 2019:
AGL ENERGY LTD INCOME STATEMENT
Actual Forecasted
Particulars 2018 2019
Revenue 12816 14098
Cost of revenue 9070 9796
Gross profit 3746 4121
Operating expenses
Depreciation and amortization 558 569
Other operating expenses 1569 1600
Total operating expenses 2127 2170
Operating income 1619 1651
Interest Expense 223 227
Other income (expense) 855 872
Income before income taxes 2251 2296
Provision for income taxes 664 677
Net income from continuing operations 1587 1619
Other 0
Net income 1587 1619
Net income available to common shareholders 1587 1619
Earnings per share
Basic 2.42 2.47
Diluted 2.41 2.46

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Comparative data analysis of Actual and Budgeted Income Statement for 2018 & 2019:
The figures obtained from the above stated forecast states that the revenue for AGL
Energy Ltd is anticipated attain growth by 10% whereas the cost of revenue is anticipated to
increase by 8% leading to ultimate growth in the gross profit by $4,121. With an increase in
expenses by 2% the projected net income of the company may rise to $1,619 from the actual
figures posted in 2018 of $1,587. The business during the 2018 financial year has suffered
public debate due to the rise in the price of electricity and gas over the recent year. According
to the financial report the business operation of AGL Energy Ltd is anticipated to expand as it
proposes to invest $300 million in new technology that would transform the experience of
customers to manage the energy costs and consumptions.
With the rise in the price of energy which is mainly driven by the higher network
costs the business has looked for newer ways for supporting its customers by introducing a
new pre-paid options which would further boost its revenue (Schipper et al., 2017). The
business anticipates a slowing momentum and has forecasted guidance range for its
underlying profit after tax of $970 million to $1073 million. To complement the strategic
risks of AGL Energy Ltd the analysis produces the income statement that vividly provides a
better future earnings growth for the business.
The comparative analysis provides that the future competency of the business can be
met. The projected financial statements for AGL Energy Ltd with higher forecasted revenue
in 2019 demonstrates the capability of the business to service debts with the real potential for
growth in business.
Conclusion:
On a conclusive note, on performing an independent analyst the company can
undertake the top down approach by using the macro economic factors so that it can forecast

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the sales and profit. By adopting the top down budgeting procedure it is possible for AGL
Energy Ltd to create a single authority for preparing the budget details to the individual line
of managers given that the sectorial revenue in the process of budgeting is respected. The top
down approach to budgeting can be implemented by the AGL Energy Ltd to stabilize the
process that otherwise runs the risks of market uncertainties for strategic planning.

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