Report on Management Accounting: Master Budget and Side Effects

This report provides a comprehensive overview of management accounting, focusing on the master budget and its implications for Rolls-Royce Holdings. It begins with an introduction to management accounting and its role in organizational decision-making. The report then delves into the preparation of a master budget, outlining the necessary steps such as forming a budget committee, identifying key factors, and creating various sub-budgets like sales, production, direct materials, direct labor, and overhead budgets. It also discusses the income statement, cash budget, and budgeted balance sheet as integral parts of the master budget. Furthermore, the report highlights the advantages and disadvantages of using a master budget. Finally, it examines the consequences of budget imposition, including potential behavioral implications on employees, inflexibility, and the challenges of setting realistic targets and performance measurement, along with the impact of external factors such as economic conditions. The report concludes by summarizing the key findings and emphasizing the importance of effective budget implementation for achieving organizational goals.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Master budget..............................................................................................................................1
Consequences that are arise from imposition of budget..............................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................6

INTRODUCTION
Management accounting is a kind of process which is used by the manager in order to
identify and interpret the information. Through this, firm will be able to make the effective
decisions that will be beneficial in achieving the financial goals (Parker, 2012). Accountants
prepare a report on timely manner so that day to day operations can be accomplished in more
effective manner. The present report is based on Rolls-Royce holdings which perform their
operations in manufacturing sector. In this context, report explains the steps which are necessary
in order to prepare the master budget. Further, it focuses on some side effects that are arise due to
imposition of budget.
TASK
Master budget
An organization prepare a master budget so that they can improve their financial position
in the market as compare to other competitors. Through this, Rolls- Royce holdings will be able
to control their income level and overall expenses. This kind of budget is based on some
elements such as profits, cost and revenues (Renz, 2016). This can be prepared on the basis of
monthly or quarterly so that at the end of financial year the target can be achieved.
The master budget is the combination of operational as well as financial budget. This is an
effective tool which can help the enterprise in providing the direction to the different staff
members of the company. Through these, the overall spending level can be controlled by the
firm and that will lead them towards success. Some steps are involved into preparing an effective
budget:
 At the first step, budget committee is formed so that they can prepare an effective budget.
In this, manager has to make the plan as per the specified goals so that their overall
financial performance can be improved.
 Identify the factors: At this stage, different factors should be identified that may affect
the budget of Rolls-Royce holdings. These factors are like employee salary, expenses and
so on.
 Sales budget: This kind of budget can be prepared so that expected sales can be
forecasted (Fullerton, Kennedy and Widener, 2013). Through this, they will be able to
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enhance their productivity level and achieve the financial goals. On the basis of this,
future sales can be forecasted which helps them in accomplishing the specified plan.
 Production budget: This budget has to be prepared by the manager of Rolls-Royce
holdings so that overall inventory level can be maintained and demand of the customers
can be fulfilled. In this, they have to perform manufacturing operations so that quality
products can be developed at flexible price.
 Direct material: This type of budget shows the material which are required in order to
manufacture the goods. When production is performed with the budgeted cost then their
overall goals can be achieved. So, through this good quality services can be developed
which is helpful for the firm.
 Direct labour budget: In this, manager has to hire the employees at the right time in
order to avoid the recruitment of unskilled staff members (Qian, Burritt and Monroe,
2011). So, in this manner overall recruitment process can be improved which helps them
in enhancing the productivity.
 Factory overhead budget: This type of budget includes some cost except direct material
and labour cost. Through this, the manufacturing industry will be able to perform their
overall operations in more effective manner.
 Selling and administrative expenses budget: This type of budget is related to the non-
manufacturing expenses of the firm. So, by using this the manager can set the proper
guideline for selling the goods and administered the different activities in more successful
manner.
 Income statement: At this stage, income statement is prepared by the company so that
operating income can be estimated in more effective manner. This kind of statement also
gives a vision to the company that how they can perform their future goals in an effective
manner.
 Cash budget: By preparing cash budget, overall activities of the firm can be performed in
more successful manner. On the basis of this, an enterprise will be able to ensure that
they have sufficient cash to carry out the different operations (Fullerton, Kennedy and
Widener, 2013). The manager of Rolls-Royce holdings will be able to plan their different
activities or operations.
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 Budgeted balance sheet: This is the last step of master budget as through this companies
will be able to know about their financial position at the end of financial period.
So, all these different steps play an important role while preparing the master budget. There
are many budgets that comes under this so that company’s overall performance can be improved
and that will lead towards their high revenues or profitability. The other budgets can help Rolls-
Royce holdings in performing their operations or activities effectively.
The functional budget of the organisation can be check with the help of cross verification of
the information which has been provided in master budget (Renz, 2016). The advantage of
master budget are as follows.
 The functional budget of the company is available in one report only.
 Overall estimate of profit of organisation are given by this master budget.
Master budget is highly helpful for the top management. The main reason behind this is that
because it provides meaningful information which are available in capsule form.
The disadvantages of master budget are as follows which have to be considered by the
managers while making any budget.
 It de-motivates the employees if the budget is prepared according to their expectations.
 The results which has been determined by the organisation are sometimes are not reliable,
so it might become the problem for the employees as well as business entity.
 The manager has regular revise the budget plan. So it become difficult for the
organisation to constantly update with the budget plan.
Budgets are not accurate they are always made on the basis of assumptions. If the
business environment in which the activities of Rolls Royce are functioning changed than it will
lead to changes in budgets as the cost and revenues of the company will be changed. If there will
be downswing in economic condition than it will directly affect economy in which activities are
running. The budgets are prepared on the end of fiscal years and remaining years there are no
strategy planned for budgets. If there are changes in market after the budgets are formed than
there are no systems designed so that review can be taken of the situation thus changes can be
made accordingly.
This situation places the company under a disaster position. Budgets required more timing
in plans and procedures where the business environment required changes (Kotas, 2014). Less
timing is needed if the plans and procedures are already defined in Rolls Royce, employees are
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aware of the budgets and company is using effective software for preparation of budgets. The
work of business can be more if there are changes in business environment and thus budgets are
to be designed according which the desired changes. If the outcomes of the budgets are not easily
achieved by the cited company than they can blame on any department within the organisation
for not achieving the desired results. Budgets are focused only with the numeric values and thus
they are considered only the qualitative aspects of business and thus it lays emphasis on
achieving profitability for organisations.
Consequences that are arise from imposition of budget
While implementation the budget by senior management there are some unwanted side
effects which can be faced by the company and their members. For example, the budgeting is
having a behavioral implication in encouraging the employees. It will impact on the performance
of staff in order to fulfill organization objectives. If senior management have set the unrealistic
targets, then it will lead in the de-motivation. Top authority have to set their targets in
appropriate manner. If these targets are set low, then budgetary slack will occur. Budget can also
lead inflexibility if managers are not supporting decision taken by the senior management.
As the manager of budget they are charging high amount from the customers in terms of
providing services and products (Parker, 2012). The budget manager of Roll-Royce is expecting
to collect range of information so that they can implement proper budget plan. Sometimes senior
management are making budget for their own benefit which will directly impact on the
performance of employees. The results of organization cannot be measured accurately by the
managers because budget are prepared on the estimate of approximately. The employees are
thinking that at the time of preparation of budget it is time consuming process so indirectly it
wastes the time of organization as well as resources also. While making the budget, sometimes it
cannot fulfil the expectation of organization. So the managers are blaming on the budget. For
this, efficient budget program is required that one person fully understand the essentials of
budgeting.
CONCLUSION
From the above carried out analysis it can be summarised that an enterprise can achieve their
goals and objectives by implementing the budget. The firm can achieve success through different
types of cash budget, income statement, production and so on. The overall financial position of
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the manufacturing firm can be enhanced. There are some consequences that can be faced by the
senior managers after implementing the master budget.
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REFERENCES
Books and Journal
Parker, L.D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1). pp.54-70.
Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control
practices in a lean manufacturing environment. Accounting, Organizations and
Society. 38(1). pp.50-71.
Qian, W., Burritt, R. and Monroe, G., 2011. Environmental management accounting in local
government: A case of waste management. Accounting, Auditing & Accountability
Journal. 24(1). pp.93-128.
Contrafatto, M. and Burns, J., 2013. Social and environmental accounting, organisational change
and management accounting: A processual view. Management Accounting Research.
24(4). pp.349-365.
Online
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http://www.cimaglobal.com/Starting-CIMA/Why-CIMA/what-is-management-
accounting/>. [Accessed on 13th June 2017].
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