Managerial Accounting Report: Master Budget Analysis and Comparison

This report delves into the core elements of a master budget, including cash, direct labor, direct materials, and ending finished goods budgets. It contrasts the top-down and bottom-up approaches to budgeting, highlighting their differences and suitability for various organizational structures. The report analyzes the budget for Abundant Produce, considering scenarios with sales, cost of goods sold, and expense growth. It also includes a detailed discussion about the comparison of the budgeted income statement with the actual statement. The study identifies key components of a master budget, such as the cash budget, direct labor budget, direct materials budget and the ending finished goods budget. The report provides a comparison between top-down and bottom-up approaches to the budget process. The report concludes with an opinion on the comparison of budgeted income statements and actual statements, offering insights into the financial performance of Abundant Produce.

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

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Executive Summary
The discourse of the report has covered the elements in present in a master budget. It has also
included discussion about the comparison of top-down and bottom-up approach to the budget
process. In addition to this, the study covered analysis of the budget for Abundant Produce
which will be based on several types of changes in budget projections. This will begin with sales
projection with a growth of 10%. In addition to this, the cost of goods sold will be considered
with a growth of 8% and the expenses forecasted with a growth of 2%. The latter part of the
study has included a relevant projection of opinion on the comparison of Budgeted Income
Statement and actual statement. The main elements of master budget are identified with “Cash
budget”, “Direct labour budget”, “Direct materials budget” and “Ending finished goods
budget”. The top-down approach of budgeting involves setting the spending limits at high level
of aggregation like total spending for the company as a whole and each line item of the
expenses included in the accounting hierarchy. On the other hand, bottom-up method requires
individual departments and reporting units to prepare their personal is spending wish list which
is segregated as per line item of expenses. As per the computation of Budgeted income
statement of 2018 for Abundant Resource the increase in revenue, cost of goods sold and
expenses has led to increase in the net comprehensive loss for the year.

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Table of Contents
Introduction.........................................................................................................................3
a. Explanation of the elements in Master Budget...............................................................3
b. A discussion about the comparison of top-down and bottom-up approach to the
budget process and rational for the chosen company....................................................................7
c. Budgeted income statement 2019..................................................................................9
d. Opinion on the comparison of Budgeted Income Statement and actual statement....11
Conclusion..........................................................................................................................14
References.........................................................................................................................16

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Introduction
The main aspects of the study have covered the elements in present in a master budget.
The second section has covered discussion about the comparison of top-down and bottom-up
approach to the budget process. In addition to this, the study has been also seen to include the
analysis of the budget for Abundant Produce which will be based on several types of changes in
budget projections. This will begin with sales projection with a growth of 10%. In addition to
this, the cost of goods sold will be considered with a growth of 8% and the expenses forecasted
with a growth of 2%. The latter part of the study has included a relevant projection of opinion
on the comparison of Budgeted Income Statement and actual statement (Shcherbina &
Tamulevičienė, 2016).
a. Explanation of the elements in Master Budget
Master budget is identified as the aggregation of budget produced in lower level with
consideration of different types of functional areas such as budgeted financial statement, cash
forecast and financing plan. It is a plan to manage the company’s sales and manufacturing
activities for meeting cash flow and profit goals. In order to create a master budget, there
needs to be a careful coordination of smaller budgets covering all parts of the organisation so
that the master budget is able to provide a realistic but not complacent result (Kalra et al.,
2015).
The typical elements of a master budget may be segregated into either quarterly or
monthly format which encompasses the entire fiscal year. The overall explanation of master
budget can be seen with assisting specific goals to achieve management actions and explaining
the strategic direction of the company. In addition to this, it may also include a discussion

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pertaining to headcount changes which are essential to achieve a budget (Sutardja, Zhu & Cao,
2016).
It can be said that a master budget is a central tool for planning which is based on direct
the activities, judging the performance about various responsibility of a corporation. Master
budget is therefore customary for senior management in reviewing several numbers of
iterations and incorporating modifications until it is able to allocate funds for achieving the
anticipated results. The company using participatory budget to arrive at a decision may impose
significant strategies by consultation with the senior management with some input from other
employees as well (Weygandt, Kimmel & Kieso, 2015). The fundamental elements which go into
creation of a master budget are listed below as follows:
 “Cash budget” “Direct labour budget” “Direct materials budget” “Ending finished goods budget” “Manufacturing overhead budget” “Production budget” “Sales budget” “Selling and administrative expense budget”
Cash budget acts as a plan for showing the expected disbursements and cash receipt
during a certain period. This includes cash inflows and cash outflows elements such as revenue
collected, loan receipts, payments and expenses paid. Cash Budget acts as an estimate of
company’s cash position in future. In general, management develops such a budget after capital

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expenditure, sales and purchases are already done. This budget helps in providing accurate
information how the cash may be affected during a particular period. For instance, such a
budget is used by the management for estimating the overall sales which can be collected
during a certain financial year (Abdullah & Djalil, 2018). Direct labour budget is essential for
computation of labour hours required to produce itemised unit in the production budget. In
various cases, this type of budget will also provide additional information on breakdown of
labour category. The direct labour budget is conducive for anticipating the number of
employees required for manufacturing a particular product. This also enables the management
in anticipation of hiring needs and other information such as scheduling over time and layoffs.
The overall information considered with the budget shows aggregate level which is typically not
used for the purpose of hiring or layoff requirements. The presentation of such an information
is done on both monthly or quarterly format (Abebe, 2018).
The ending finished goods inventory is associated with computing the cost involved in
producing the finished goods during the end of each budgeting period. However, such a budget
will also include the total unit quantity of finished goods at the end of each budgeting period.
The real source of the information can be considered with production budget. The main
purpose of such a budget can be seen with providing the estimate of inventory asset which
appears under budgeted balance sheet. This is necessary for determining the amount of cash
which is to be invested in the assets. The cost television for such budget will include direct
material, direct labour and overhead allocation. The subdivision of selling and administrative
expenses will further include budget from individual departments such as marketing, facilities,
engineering and accounting. The ending inventory also considers the carrying value which
refers to the ending value of finished goods pertaining to use of previous year’s beginning

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inventory for the current year. In order to arrive at the final value this budget subtracts the cost
of goods sold from the total goods which are available for sale (Bernau, Hahn & Boehler, 2018).
After finalisation of the master budget and accounting staff mentor the details into
accounting software so that it is able to issue financial reports for the purpose of comparing
actual results and budgeted data. After the creation of master budget and accounting staff may
decide to enter the results in companies accounting software so that it is able to issue financial
report for the purpose of comparing budgeted and actual anticipated results. Several smaller
organisations construct the master budget with the use of electronic spreadsheet. Despite of
this, such spreadsheet may consist of errors in formula which may be facing difficulty during
construction of a budgeted report. On the contrary, larger organisations tend to implement
budget specific software solutions which does not have any difficulty in producing budgeted
balance sheet (Arora, 2016).
It is to be understood that lower-level budgets have an appropriate format for arriving
at a certain outcome like fully absorbed cost of finished goods inventory and number of units to
be manufactured for a product. However, such ideology is not applicable in case of preparing a
master budget. In case of a master budget, the income statement and balance sheet are
prepared based on relevant accounting standard. The main difference can be identified in the
cash budget which does not necessarily appear in a standard format under statement of cash
flows. Instead of this, it is seen to be more practical for depicting the specific cash outflows and
inflows which will result from the rest of the budgeted model. Manufacturing overhead budget
includes manufacturing costs excluding direct material and direct labour. This budget provides
the necessary information on manufacturing overhead which becomes a part of cost of goods
sold in the master budget (Eisenberg, 2016). Production budget provides an estimate of the

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number of units which must be manufactured and derived from the combination of sales
forecast including planning of finished goods inventory. The typical element of production
budget and the identified with including a push Manufacturing system as evident in material
requirements planning environment. The production budget is usually considered either
quarterly or monthly. As per the information of the sales budget it provides the management
estimate about sales for future financial period. This is used by the management to set
departmental goals and forecast production requirements (Miller-Nobles, Mattison &
Matsumura, 2016).
b. A discussion about the comparison of top-down and bottom-up approach to the budget
process and rational for the chosen company
The top-down approach of budgeting involves setting the spending limits at high level of
aggregation like total spending for the company as a whole and each line item of the expenses
included in the accounting hierarchy. On the other hand, bottom-up method requires individual
departments and reporting units to prepare their personal is spending wish list which is
segregated as per line item of expenses. In general, as per bottom-up method there will be
higher spending targets envisaged in compared to top-down approach. Therefore, top-down
approach uses reconciliation process for producing companywide information which equals the
whole (Law, 2016).
The top-down budgeting involves senior management to develop high-level budget for
the entire organisation. After the completion of such a budget, the individual amounts are
allocated to the departments which should then take those numbers and build the
corresponding budgets confined to the executive level budget creation. On the other hand, I

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bottom-up budgeting approach begins in the individual departments when the manager creates
any budget and forwards the same for approval of higher authority. This type of budget is
either revised, approved and created with various departmental creations (Weygandt Kimmel &
Kieso, 2015).
A more detailed comparison of both the budget shows that, top-down budgeting can
have a greater potential for accuracy in large aggregates. On the other hand, bottom-up
approach may consist of errors which are accumulated as roll ups resulting in larger totals. The
overall analysis of both the budgeting shows that as Abundant Produce specialises as a hybrid
plant breeder which is dedicated in translating Australia’s world-class agricultural science in a
commercially viable intellectual property. The main changes set out by the company is aimed
towards commercialisation and development of high-value food crops especially greenhouse
vegetables like cucumbers, tomatoes and selecting breeding lines which are developed by
scientists at the University of Sydney (Järvinen, 2016).
Therefore, a large aggregate of the company depends on producing accurate budget
estimate of a specific segment which is associated with agronomy. It is important that the top
management of Abundant Produce takes relevant reports on budget estimates and forecasting
from the relevant departments. Moreover, this budgeting process will be appropriate for
accounting day-to-day expenses involved in production (Ardiansyah, Pituringsih & Irwan, 2017).
As a result, a bottom-up approach will improve the budget estimates as they will be created by
the individual managers of these department and forwarded for approval of higher
management. This will also lead to increased ownership and result in more information as the
employees are familiar with individual departments creating the budget. Some of the other
benefits for proceeding with bottom-up approach in case of Abundant Produce can be directly

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associated to increased, negation, understanding and commitment levels on behalf of the
manager (Abdullah & Djalil, 2018).
c. Budgeted income statement 2019
The budgeted income statement has considered significant changes pertaining to
revenue and cost of goods sold. In addition to this, it is also prepared with necessary changes
under the expenses section. The changes made in the revenue has been identified with the
projected change of 10% on the actual income in 2018. Similarly, the cost of goods sold is
depicted with 8% increase in compared to the income of 2018 (Harvey, 2015). The computation
of gross profit in the budgeted income statement of the 2018 have shown that there is an
increase in total Gross profit from AUD 8,56,907 in 2018 to AUD 9,48,152 in 2019. Some of the
additional changes in the projected budget in terms of expenses can be identified with a 2%
increase in expenses. This includes expenses such as “Consultancy expenses”, “Insurance
expense”, “Inventory write-off”, “Depreciation and amortisation expense”, “Directors’ fees”,
“Travel expenses”, “Occupancy expenses”, “Research expenditure”, “Share based payment
expense” and “Other expenses”. Despite of increase in the overall category of expenses, the
loss before income tax for the company has decreased as a result of increasing sales. This is
evident with a decrease in loss before income tax from AUD -20,23,081 in 2018 to AUD -
19,89,436. Similarly, the income tax benefit expense has also increased by 2%. This has
decreased loss after income tax as well as total comprehensive loss for the year. Therefore, as
per to table can be clearly inferred that after application of the changes pertaining to budgeting
there has been a significant improvement in gross profit. However, in terms of loss before
income tax and total comprehensive loss for the year the company needs to show
improvement (Shcherbina & Tamulevičienė, 2016).

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Particulars
Projected Income in
2019
Particulars Amount
Revenue 1248068
Cost of goods Sold -299916
Gross profit/(loss) 948152
Consultancy expenses -701135
Insurance expense -10835
Inventory write-off 0
Depreciation and
amortisation expense -286278
Directors’ fees -134640
Travel expenses -52561
Occupancy expenses -66111
Cucumber Seeds Written
Off -138271
Research expenditure -454493
Employee benefits
expense -602211
Other expenses -491052
(Loss) before income
tax -19,89,436
Income tax
benefit/(expense) 0
(Loss) for the year -1989436
Other Comprehensive
Income 0
Total comprehensive
(loss) for the year -1989436
Budgeted income statement 2019
Table 1: Budgeted Income Statement For 2019
(Source: Abundantproduce.com, 2019)

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d. Opinion on the comparison of Budgeted Income Statement and actual statement
The figure showing comparative budgeted income statement of the projected changes
in 2019 and actual income in 2018 have shown significant differences pertaining to revenue,
expenses and cost of goods sold. As per the information given in table 2 it can be inferred that
the computation of gross profit in the budgeted income statement of the 2019 have shown that
there is an increase in total Gross profit from $ 8,56,907 in 2018 to 9,48,152 in 2019. Moreover,
change pertaining to cost of goods sold shows that there has been a significant increase in cost
of goods sold from actual income statement to the projected income statement of 2018. The
increase in the cost of goods sold is evident with AUD -2,77,700 in 2018 to AUD -299916 in
2019. Moreover, as there has been a decrease in the overall category of expenses the loss
before income tax for the company has also increased. This is evident with a decrease in loss
before income tax from AUD -20,23,081 in 2018 to AUD -19,89,436 in 2019 (Jaafar, Bakar &
Awaluddin, 2015).
The change in budgeting can be resulted from a number of factors which includes price
of the product and changes in income pattern consumer. As per the comparison of actual
income statement and budgeted income statement it can be clearly seen that the company has
struggled to make any profitable progress over the last few years. Due to this, there is a
possibility that in case the overall sales are increased their can be a significant change brought
in increasing the overall comprehensive income for the year (Marcu et al., 2016). However, it is
also important to consider the proportion by which such a change has been brought. In the
given case the increase in revenue by 10% and increasing cost of goods sold by 8% we were not
sufficient to compensate the expenses incurred by the company in 2018. Therefore, despite of
increasing gross profit, the expenses incurred by the company has not been effective to on a