HI5017 - Managerial Accounting: Master Budget, Approaches & Analysis

This report provides a comprehensive analysis of master budgeting in managerial accounting. It begins by describing the essential elements of a master budget, including the manufacturing overhead budget, production budget, sales budget, and cash budget, emphasizing their role in managing manufacturing, sales, profitability, and cash flow. The report then compares top-down and bottom-up budgeting approaches, relating them to ActivEX Limited, a Brisbane-based mining company, and discusses how these approaches impact budget projections. It also examines the differences between the budgeted income statement for 2019 and the actual income for 2018, offering assertions for these variances, highlighting increased expenses and cumulative losses. The report concludes that a top-down approach is suitable for ActivEX Limited due to its large aggregate estimations and the need for top management oversight in budgeting, while also noting the importance of considering day-to-day operational expenses.

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

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Executive Summary
The report has depicted several aspects of preparing a master budget. The initial discussions
include considering various elements in preparing master budget. This discourse is followed by
identifying the differences of top-down and bottom-up approach in the budget process and
relate the same with Brisbane-based mining and mineral resource explorer ActivEX Limited. The
overall discussions of the study will identify various types of changes pertaining to projections
within the budget of the company. The final section of the report has considered the
differences observed between the budgeted income statement prepared for the year 2019 and
actual budgeted income of 2018. The several types of assertions have stated about the
rationale for such difference. The findings show that the different elements in the master
budget is considered to be essential in managing the manufacturing and sales activities for
accompanying the profitability and cash flow goals. Moreover, as ActivEX Limited deals with
large aggregate while estimation of specific segments in a budget. It is essential that such a
nature of budgeting estimate is taken under the responsibility of the top management for
estimating the budget requirements in the necessary segments. The top-down budget
approach will be appropriate in knowing about the day to day expenses considered during the
mining operations. Additionally, the assertions made from table 2 the projected income is
identified with increasing amount of expenses leading to cumulative the loss before income tax
from $ -6,48,677 in 2018 to $ -6,61,529 in 2019.

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Table of Contents
Introduction.........................................................................................................................3
a. Description of the elements in the Master Budget.........................................................3
b. A discourse on comparison of top-down and bottom-up approach to the budget
process and reason for application of the same in chosen company.............................................8
c. Budgeted income statement 2019................................................................................10
d. Opinion on the comparison of Budgeted Income Statement and actual statement....11
Conclusion..........................................................................................................................14
References.........................................................................................................................15

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Introduction
The learnings of the report have been seen with covering several aspects of preparing a
master budget. In the first section the discussions are relevant with considering various
elements of the master budget. The second segment of the study is evaluated on the
differences of top-down and bottom-up approach in the budget process and relate the same
with Brisbane-based mineral resource explorer ActivEX Limited. The overall discussions of the
study will identify various types of changes pertaining to projections within the budget of the
company. The initial study is considered the growth in sales projection with 10%. Subsequently,
the growth in cost of goods sold and be identified as 8%, along with growth in expenses of 2%.
The final section of the report has considered the differences observed between the budgeted
income statement prepared for the year 2019 and actual budgeted income of 2018. The several
types of assertions have stated about the rationale for such difference (Barr & McClellan, 2018).
a. Description of the elements in the Master Budget
The preparation of master budget begins with aggregating the budget produced in a
lower level hierarchy by consideration of various types of functional areas such as finance plan,
cash forecast and budgeted financial statement. The different elements in the master budget is
considered to be essential in managing the manufacturing and sales activities for accompanying
the profitability and cash flow goals. The preparation of a master budget should be based on a
careful coordination of smaller budgets thereby covering all segments of an organisation so
that it is able to provide a realistic information (Zietlow et al., 2018).
In general, the segregation of master budget can be done with either monthly or
quarterly basis in a financial year. The explanation of master budget can be identified with

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assisting necessary goals for achieving the management actions and also following up with the
strategy directions of the company. Moreover, the master budget is seen to include a
significant discussion about changes in activities for achieving a certain budgetary goal (Kaplan
& Atkinson, 2015).
Therefore, master budget is regarded as the primal tool for directing the activities and at
the same time identifying the performance responsibility factors of the corporation. It is
customary for the higher management for reviewing several types of iterations and
incorporation which is based on inferring a certain anticipated result. The companies seem to
use such a budget process to arrive at any decision as per consultation with the senior
management and taking reliable input from employees (Burtonshaw-Gunn, S2017). Some of the
main elements of the master budget are listed as follows:
1. “Manufacturing overhead budget”
2. “Production budget”
3. “Sales budget”
4. “Selling and administrative expense budget”
5. “Cash budget”
6. “Direct labour budget”
7. “Direct materials budget”
8. “Ending finished goods budget”
It can be said that cash budget is associated with identification of expected
disbursement related to cash receipt in a certain time period. The cash but it is inclusive of cash
outflows and cash inflows such as expenses, payments, receipts and revenue collected. In

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addition to this, such a budget acts as the estimate of position of cash in the future for any
organisation. The management team is concerned to develop such a budgeting technique after
the purchases, sales and expenditures are already allocated. This type of budget is also
conducive in showing accurate information of how the cash may be affected in a certain
financial year. For example, cash budget can be used by the management for estimation of
overall cash pertaining to sail sales which can be collected in a particular year (Alviniussen &
Jankensgard, 2015).
Direct labour budget is an important estimation for direct labour hours which is
required for producing a particular item within the production budget. In several instances, the
direct labour budget is able to provide important information about segregation of each
category of the labour costs. Therefore, this type of budget is useful for estimating the total
number of employees essential for manufacturing a particular product along with the cost
segregation. Direct labour budget is also important for the management in evaluating the needs
related to hiring, scheduling and layoffs. Typically, this type of budget is able to provide an
aggregate level of information of cost which is essential for hiring and layoff requirements. This
type of budget information can be published both on quarterly and monthly basis (Dudin et al.,
2015).
Direct material budget acts as estimation of total materials which is to be purchased in
a given period of time for fulfilment of the necessary requirements of the production budget. In
general, this information can be produced in both monthly or quarterly format in the master
budget. A business which is involved in selling products, this type of budget may be conducive
for noting down all the costs which are incurred in a particular financial year. The basic
computation of such a budget includes summation of raw materials and planned ending

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inventory balance thereby subtracting the previous year’s raw material inventory (McKinney,
2015).
Ending finished goods inventory budget is conducive in determining the cost which is
needed for manufacturing finished goods at the end of each budgeting period. However, it is
important to understand that ending finished goods inventory budget also includes necessary
estimation for total unit of the finished goods quantity which is displayed at the closing of each
budgeting period. The main source of information pertaining to this type of budget is seen with
production information. The use of such a budget is important for estimating the total amount
of cash which is to be invested in the assets. For instance, in estimation of cost of machine for
such a budget film include overallocation, direct material and direct labour as well (Martin,
2016).
The segregation of selling and administrative budget is seen with including the
expenses for the individual departments such as facilities, counting and engineering. It can be
said that this type of budget includes ending inventory for estimating the carrying value which
is referred as the closing balance of the finished goods which was used as the previous years
beginning inventory. This balance is used for the current year. The final value for such a budget
is arrived by subtracting the cost from the goods sold with total goods which is to be sold (Van
Dooren, Bouckaert & Halligan, 2015).
The manufacturing overhead budget considered the necessary cost for manufacturing
excluding the total cost for direct labour and direct material. This type of budget is essential in
fetching the necessary information about manufacturing items which is considered as a
essential part of cost of goods sold (Menifield, 2017).

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The production budget is considered as conducive in estimating the total number of
units which are needed to be manufactured along with combination of sales forecast including
planning of finished goods inventory. The necessary considerations for production budget are
seen with including the necessary elements of push manufacturing system which are important
in depicting the necessary military requirement and planning environment. In general, the
production budget is produced both annually and quarterly. The management uses such
information for setting the corporate goals and predicting future production requirements
(Bryce, 2017).
After completion of preparing master budget, the details of individual budget
information are entered into the accounting software for the progression of final financial
reports and comparing the budgeted to do with actual results. After proceeding with creating
master budget, the accounting staff may consider to enter the relevant results into accounting
software for issuing an in-depth analysis of future budget predictions and comparing the same
with previous budget (Matthew, 2017). A significant nature of the smaller corporations often
considers preparing the master budget with use of accounting software such as electronic
spreadsheet. However, it needs to be noted that such a spreadsheet is also prone to consist of
errors in the formula which may result in giving inaccurate information in the budgeted report.
On the other hand, the big corporations are more likely to implement a budget specific solution
to not only avoid any hindrance in producing budgeted balance sheet but also obtain
continuous support from the software vendor (Maxwell et al., 2015).
The budgets prepared at the lower level needs to follow a relevant format for
consideration of a certain outcome which is associated to using apps of costing of finished
goods inventory and several numbers of other considerations related to preparing the final

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budget. It is to be seen that the master budget consists of the income statement and balance
sheet as per the relevant accounting standard. The significant differences following the cash
budget can be inferred with standard format maintained under the statement of cash flows.
Despite of this, it is regarded to be a more practical decision for identifying specific inflows and
outflows of cash which is a result of the overall budgeted model (Bekaert & Hodrick, 2017).
b. A discourse on comparison of top-down and bottom-up approach to the budget process
and reason for application of the same in chosen company
The top-down budgeting approach is considered as setting the overall spending on the
higher side based on aggregate of the total cost which is spent by the company on individual
line items. On the contrary, the bottom-up approach is considered more with the contributions
made by the individual departments pertaining to reporting units for preparing personal
spending wish list and allocating the individual items of expenses. The general consideration of
bottom-up approach can be depicted with setting higher spending targets which is focused with
comparing the top-down approach. Henceforth, it is essential to use such an approach to
reconcile the process of production and company using this information to equal the entire
budget (Karadag, 2015).
The top-down budgeting approach is however considered with senior management to
develop a high-level budget pertaining to the entire entity. The completion of such a budget
shows that the individual amounts are depicted in relevant departments which are to be
considered with certain numbers and build the corresponding budgets confined within the
executive budget creation. In the bottom-up approach the process of budgeting starts when the
department individually create any budgeting information and forwards a same to the higher

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management. After this the budget is revised and approved with the relevant department
(Chohan & Jacobs, 2017).
A more vivid comparison of both top-down budget and bottom-up budget identifies that
there can be a greater potential for top-down budget for ensuring accuracy in the larger
organisations. On the contrary, bottom-up budget approach may involve several inaccuracies in
estimating results based on large totals. The analysis pertaining to both budgeting
consideration shows that ActivEX Limited is mainly focused to succeed as a profitable
exploration and mining entity. The extensive portfolio of the company includes granted mining
lease in Western Australia and granted exploration permits for minerals in Queensland. Can be
further saying that the company is successful in maintaining an advanced potash project in
Western Australia by investing in optimal methods for leaching and extraction of potash and by-
products. ActivEX Limited aims to pursue quality restoration development opportunities with
increasing up side values (Osadchy & Akhmetshin, 2015).
Therefore, it can be seen that the company deals with large aggregate while estimation
of specific segments in a budget. It is essential that such a nature of budgeting estimate is taken
under the responsibility of the top management for estimating the budget requirements in the
necessary segments. The top-down budget approach will be appropriate in knowing about the
day to day expenses considered during the mining operations. As a result of this, the top-down
approach of budgeting will be essential in improving the overall budget estimates as it will
require allocating higher cost for the individual segment which is essential for any mining
operation. Therefore, despite of involving large aggregate it can be seen that the company is
consistent with several segments such as mineral exploration, mining, extracting and producing.

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Therefore, the individual costs are different for each segment. It top-down approach will be
conducive in ensuring the accuracy of such an estimate (Ahrens & Ferry, 2015).
c. Budgeted income statement 2019
The necessary considerations in the budgeted income statement 2019 has been focused
with cost of goods sold, revenue and expenses. The alterations with the revenue are seen with
a projected change of 10% based on the actual income in 2018. In a similar manner the changes
pertaining to cost of goods sold is identified with 8% increase in the overall value in compared
to 2018. In a similar manner, the expenses are projected with an additional increase of 2%
based on the actual expenses incurred in 2018. As there has been no change in other income,
the gross profit in the projected income statement of the company increased from $ 7764 in
2018 to $ 8040 in 2019. It is to be also seen that as the company is based on exploration
projects it does not have any cost of goods sold or cost of sales. Therefore, it is excluded from
the master budget. The consideration of main expenses in the income statement can be
identified with items such as “Corporate & administrative expenses Employee benefit
expense”, “Occupancy expenses”, “Current year exploration & evaluation expenditure
written-off” and “Impairment - of exploration assets”. It can be clearly evident that as the
projected income is identified with increasing amount of expenses, the loss before income tax
has significantly increased from $ -6,48,677 in 2018 to $ -6,61,529 in 2019. In addition to this,
the overall comprehensive loss in the year has similarly increased. Based on the depictions
made in table 1 it can be stated that the change in budget projections have only contributed
positively towards Ross profit. However, due to increasing amount of expenses that of the
comprehensive loss for the year has increased (Ebdon & Franklin, 2015).

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Particulars
Projected Income in
2019 ($)
Particulars Amount
Revenue 3040
Other Income 5000
Gross profit/(loss) 8040
Corporate &
administrative expenses -259984
Employee benefit
expense -263737
Occupancy expenses -115203
Current year exploration
& evaluation
expenditure written-off -12349
Impairment - of
exploration assets -18297
(Loss) before income
tax -661529
Income tax
benefit/(expense) 0
(Loss) for the year -661529
Other Comprehensive
Income 0
Total comprehensive
(loss) for the year -661529
Budgeted income statement 2019
Table 1: Budgeted Income Statement of ActivEX Limited For 2019
(Source: Listcorp.com, 2019)
d. Opinion on the comparison of Budgeted Income Statement and actual statement
The overall compared a figure from the budgeted income have been identified with the
changes in 2019 as per the projected budget and actual income obtained by the company in

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2018. Additionally, the comparison is based on changes in the income statement related to cost
of goods sold, revenue and expenses. The information obtained from table 2 shows the overall
projected gross profit increase from$ 7764 in 2018 to $ 8040 in 2019. It is to be also seen that
as the company is based on exploration projects it does not have any cost of goods sold or cost
of sales. Therefore, it is excluded from comparison of budgeted income statement and actual
income statement. The overall comparison of expenses shows that Corporate & administrative
expenses increased from $ -2,54,886 in 2018 to $-259984 in 2019 projected income statement.
Similarly, Employee benefit expense increased from $ -2,58,566 in 2018 to $ -263737 in 2019. In
addition to this, there was a relative increase of 2% among other expenses such as occupancy,
exploration and evaluation expenditure and impairment of exploration assets. As per the
assertions made from table 2 the projected income is identified with increasing amount of
expenses leading to increasing the loss before income tax from $ -6,48,677 in 2018 to $ -
6,61,529 in 2019 (Otley, 2016).
The changes in the budgeted result can be identified with different types of factors
which include general exploration activity pattern among the consumers. As per the table of
comparison of the actual income statement and projected income statement the company has
not been able to put itself in a positive position in terms of future income earning (Brigham et
al., 2016). As a result of this, there is a possibility of increasing the total revenue and other
income to compensate the increasing expenses such as corporate and administrative, employee
benefit, occupancy and exploration activities. The changes brought in revenue and other
income will be also useful for the company in bringing a positive change to the total
comprehensive income. There is significant scope for ActivEX Limited to prioritise the list of
expenditure to improve the overall performance. The ramifications in the budgeted income

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statement will be also essential in focusing on increasing amount of revenue and decreasing
total expenses (Grossi, Reichard & Ruggiero, 2016).
Particulars
Actual Income in
2018 ($) Projected Changes
Projected Income in
2019 ($)
Revenue 2,764 110% 3040
Other Income 5,000 100% 5000
Gross profit/(loss) 7,764 8,040
Corporate & administrative
expenses -2,54,886 102% -259984
Employee benefit expense -2,58,566 102% -263737
Occupancy expenses -1,12,944 102% -115203
Current year exploration &
evaluation expenditure
written-off -12,107 102% -12349
Impairment - of exploration
assets -17,938 102% -18297
(Loss) before income tax -6,48,677 -6,61,529
Income tax
benefit/(expense) 0 102% 0
(Loss) for the year -6,48,677 -6,61,529
Other Comprehensive
Income 0 0
Total comprehensive (loss)
for the year -6,48,677 -6,61,529
Comparison of Budgeted Income Statement and actual statement
Table 2: Budgeted Income Statement 2019 And Actual Income Statement 2018 Comparison of
ActivEX Limited
(Source: Listcorp.com, 2019)

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Conclusion
The description of the elements in the Master Budget shows aggregating the budget
produced in a lower level hierarchy by consideration of various types of functional areas such as
finance plan, cash forecast and budgeted financial statement. Some of the main elements of
the master budget are identified as the primal tool for directing the activities and at the same
time identifying the performance responsibility factors of the corporation. Comparison of top-
down and bottom-up approach has identified that the top-down budgeting approach is
considered as setting the overall spending on the higher side based on aggregate of the total
cost which is spent by the company on individual line items. On the contrary, the bottom-up
approach is considered more with the contributions made by the individual departments
pertaining to reporting units for preparing personal spending wish list and allocating the
individual items of expenses. As per the changes in cost of goods sold, revenue and expenses,
the gross profit in the projected income statement of the company increased from $ 7764 in
2018 to $ 8040 in 2019. However, it can be also seen that as projected income is identified with
increasing amount of expenses by 2%, the loss before income tax has significantly increased
from $ -6,48,677 in 2018 to $ -6,61,529 in 2019. The changes in the budgeted result can be
identified with different types of factors which include general exploration activity pattern
among the consumers. Based on table of comparison of the actual income statement and
projected income statement the company has not been able to put itself in a positive position
in terms of future income earning.

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