Managerial Accounting Techniques: Austral Gold Limited

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Managerial Accounting
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Executive Summary
Austral Gold Limited is selected for the analyses of management accounting technique. This
company is established in 1824 and it is the largest cattle and beef producer in overall Australia.
Companies’ main objective is the development of pastoral properties and the production of
beef. The company owns a lot of properties which includes farms and feedlots. It has 7 million
hectares of land in Queensland and Northern region. It also dedicated to the innovation
regarding environmental management. It involves production, sales, and marketing of beef and
other beef related products. The company is producing Wagyu beef which is exported to more
than 20 countries. The company has a sound operational environment.
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Table of Contents
Executive Summary....................................................................................................................... 2
Introduction...................................................................................................................................4
(A) What is the master budget and define its elements?..............................................................5
(B) Define what is top down and bottom up approach of the budgeting process and identify
which process is more suitable for the company mentioned above?............................................8
(c) Preparation of budgeted income statement of the year ended 2019 on the basis of the
annual report of 2018?................................................................................................................ 12
(D) Compare budgeted income statement of the company for the year 2019 and actual income
statement for the year 2018 of the company Austral Gold Limited?..........................................13
Conclusion................................................................................................................................... 16
References................................................................................................................................... 17
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Introduction
This report defines the budgeting section of the managerial accounting and its importance in
accounting practice and data analyses. Management accounting helps in planning, decision
making and identify the problems at the accurate time. It also helps management in effective
strategic decision making. The master budget is explained in the report and its importance in
the strategic decisions is also mentioned. Austral Gold Limited is selected for the analyses in
term of budgetary control. It contains the definition of different techniques of preparation of
the master budget and explains which approach is suitable for the selected company.
Comparison analyses of projected and actual income statement are disclosed and detail
analyses are given for the variances in the results of comparisons. This report also prepares
projected income statement for the year 2019 on the basis of information derived from the
annual report of Austral Gold Limited for the year ended 2018.
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(A) What is the master budget and define its elements?
The master budget is a comprehensive presentation of all diverse budgets from the different
department of an Organization. It also includes the company’s financial budgets as well. It
shows companies overall performance in one budget. The master budget is considering as a
planning tool for management to identify the areas of improvement in the organization and
also evaluate the best possible way to establish coordination between the diverse function of
an entity. Management can compare the performance of an entire organization with the
budgeted figures and perform action accordingly. It demonstrates companies projected sales,
expense, production, and financial figures. Austral Gold Limited can prepare the different lower
level budget to identify the individual target of different department and also prepare the
master budget with the combination of all the individual budgets. Different types of the budget
which comprises in the master budget are as follow:
Production budget
It defines the quantitative aspect of the total manufacturing process. Finished goods inventory
management is depending on the production budget. It shows total units required to produce
as well as the total cost of producing those units.
Sales budget
It shows the projected sales in a qualitative and quantitative manner. It helps to identify
department goals and estimated production. It affects the operating budget and master budget
of the company as both budgets include an element of sales in their formation.
Labor budget
It estimates a total number of labour hours required for the projected production of the
company and also totals estimated labour cost for the labour hours required. It helps in
optimum utilization of labour resources in the production process.
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Material budget
It comprises of budgeted units and cost of raw material required for the estimated production
units. It affects the operating cost of the entity in a very significant manner. It also includes the
procurement process of the material and how it uses in the given period of time.
Manufacturing overhead budget
It includes all cost of production other than direct labour and direct material cost. These costs
can be controlled as they can significantly affect the overall cost of the production. These costs
are also known as the indirect cost of production.
Selling and administrative budget
It forecast overall selling cost and advertisement cost of the total sales of an organization.
Marketing cost should be controlled effectively so that product can be produced at the
minimum per unit indirect element.
Cash budget
It shows expected cash inflow and outflow from the company’s activities in a given period of
time. It helps management to identify the cash position of the company throughout the year
and identify the issues for insolvency.
Elements of master budgets are as follows:
Income
Different types of income are included in the master budget as per the operational activity of
the business. Overall the forecast is based on the sales budget and margin budget of the
company. The master budget does not include other than the operating income of the business
as these incomes are not the main concern of the business. Performances of managers are
evaluated on the basis of the total projected income mentioned in the master budget.
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Direct and Indirect Expenses
This element includes the total cost of the production of the company comprises of direct
material and labour cost as well as the overhead cost of the production. Managers can identify
the different portion of the total cost and evaluate which cost portion needs focus. It is
classified as a fixed and variable cost.
Net losses and profit
The master budget shows monthly, quarterly and annual figures of net profitability of the
company. It gives management a comparative basis for the analyses of the company’s
profitability at a different period of the year. Austral Gold Limited can monitor the performance
of the company and take corrective actions when required.
Other reports
Austral Gold Limited can make a budget with the other reports as well such as the report on the
profit margin of the company, reports on the operational efficiency of the company, factual
findings of the inventory etc.
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(B) Define what is top down and bottom up approach of the budgeting process and identify
which process is more suitable for the company mentioned above?
There are mainly two techniques of budgeting top-down approach and bottom-up approach.
Budgeting is very important techniques of data analyses and evaluation of performance on the
basis of different criteria. The top-down approach is where the decision is taken at higher
authority and communicated to the lower level of management. The bottom-up approach is
defined as a mechanism where the suggestion is given by the lower level of management and
transferred to a higher level of management. Both approaches to budget give significant
advantages to the organization. According to the process of individual business activity budget
technique is used.
Budget techniques are defined as follows:
Top-down approach
In this approach of budgeting strategic goals are determined by the top management and filter
down to the lower level of management for the implementation process. In this approach
breakdown of work and planning of the project is done by the manager and effectively
communicated to the employees when the task becomes due. This approach is a traditional
approach to budgeting. It generally uses where projects are not new to the organization and
very few unique challenges are there in the work. It gives centralized management of the
project and improves work accountability. Some organizations have an opinion that this
approach will make lower level employee and authority demotivated.
In this approach, once the budget is created by the senior authority then the amount of budget
for the individual department of the organization is been allotted and every individual
department prepares its budget according to the amount allocated. This technique gives
preference top management for prioritizing and manage the day to day business activities.
The top-down approach can help in the growth of the business as it facilitates a clean line of
authority, quality control, standardization of services and product.
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Advantages of a top-down approach
Lower risk factor
Senior management of the organization has the most knowledge about the company and
external factors which can affect the company’s performance. Hence the decision-making
process in this approach far more reliable and less risky.
Cost minimization
The lower level of management is not involved in the planning and organization of the overall
strategy and budget. This can result in a significant saving of time of the lower authority and
they can focus on the implementation in a better way.
Organization of resources
The amount for Individual budgets are already determined and effectively communicated.
There is no confusion regarding the budget process for the individual department as the
amount is set by upper level without affected by external factors.
Efficient management
Senior management able to take decisions in an effective manner as they know the internal and
factors of the organization and decision made by them will lead to effective management since
there will be no conflict in the budgetary process. Accountability and individual responsibility
are already mentioned between lower management.
Disadvantages of Top-down approach
As compare to benefits of the approach there are also certain downfalls as well. This approach
does not welcome creativity approach as employees and lower segment of the organization is
unable to contribute in the new projects and budgets. This will also lead to lower problem
solution process because all the preparation knowledge of the budget is with the management
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only and it will take time for management to resolve the issues after it comes into their
knowledge.
Bottom-up approach
It is the modern approach of budgeting technique. In this approach, every individual
department has the opportunity to present the requirement of their department and make
budget process according to them. In bottom-up approach as the well main objective of
budgets are decided by the top level of authority however lower level can give their input in the
budgeting process to make it more compatible and friendly. It results in more realistic
budgeting process as employees and lower management also become part of the planning of
budget and they feel motivated. This technique is more suitable for the industry where new
challenges and a new approach is required for work management and needs innovation.
In this approach individual department prepare individual budgets and send it to the upper-
level authority for approval and the higher authority can approve, modified and revise the
budget. After this process master budget is prepared after considering all the above
modification and revisions.
Advantages of a bottom-up approach
Collaborative environment
Every department is involved in the process of decision making and it gives an edge since trust
is built throughout the organization.
Motivated employees
Active participation of every employee in the process of budgeting leads to motivated
employees as they feel valued. It will create a supportive and positive environment within the
organization.
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Disadvantages of Bottom-up approach
This approach results in higher time consuming and higher cost consuming as decision are
taken by a lot of employees and lower management. It becomes very difficult to reconcile all
the individual budgets into a compressive master budget. As initiation of a process is at lower
management hence sometimes budgeting process lost its original objective.
Both projects have their own advantages and disadvantages however many organizations
started adding certain elements of the bottom-up approach in the process of budgeting as it
gives innovative ideas to the organization which helps in to gain competitive advantages. Even
for repetitive work as well organization opted for the bottom-up approach as this will gives
employees satisfaction and helps to identify new opportunities. Austral Gold Limited is involved
in the repeatable work of production of beef and there no such requirement of experiment and
innovation as the company already well-established hence for the top-down approach is best
for the company.
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