Management Accounting 3: Budgeting and Performance Analysis Solution

This document presents a comprehensive solution to a management accounting assignment. Part A focuses on preparing a master budget, including manufacturing overhead, purchase, and direct material budgets. Part B provides an analysis of a new manufacturing facility investment, evaluating its impact on costs, sales, and cash flow through various budgets and financial statements, including a cost of goods manufactured statement and cash flow analysis. The analysis considers the financial implications of the investment for Heidegger Pty Ltd. Part C delves into the behavioral aspects of budgeting, comparing imposed and participatory budgeting approaches. It examines the implications of each approach on employee motivation, communication, and goal congruence, concluding that participatory budgeting is more effective in addressing behavioral concerns and promoting organizational performance. The solution utilizes flexible budgeting formulas and provides detailed calculations and analysis to support its conclusions.

Running head: MANAGEMENT ACCOUNTING
Management accounting
University Name
Student Name
Authors’ Note

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Answer to Part A:
Preparation of basic master budget:
Manufacturing Overhead Budget:
Particulars April May June
Direct Labor Hour 75760 119720 140160
Indirect Labor Cost per DLH $30.66 $30.66 $30.66
Total Indirect Labor Cost $23,22,802 $36,70,615 $42,97,306
Power Cost per DLH $2.92 $2.92 $2.92
Total Power Cost $2,21,219 $3,49,582 $4,09,267
Variable Maintenance Cost per unit $37.78 $37.78 $37.78
Variable Maintenance Cost $28,62,044 $45,22,756 $52,94,933
Fixed Maintenance
$1,66,03,44
4
$1,66,03,44
4
$1,66,03,44
4
Total Maintenance Costs
$1,94,65,48
9
$2,11,26,20
0
$2,18,98,37
8
Other Variable Cost per unit $21.90 $21.90 $21.90
Other Variable Cost $16,59,144 $26,21,868 $30,69,504
Other Fixed Cost $73,00,000 $73,00,000 $73,00,000
Other Manufacturing Costs $89,59,144 $99,21,868
$1,03,69,50
4
Supervision
$2,04,40,00
0
$2,04,40,00
0
$2,04,40,00
0
Depreciation $18,25,000 $18,25,000 $18,25,000
Rates & Utilities $15,08,200 $15,08,200 $15,08,200
Budgeted Manufacturing Overhead
$5,47,41,85
4
$5,88,41,46
6
$6,07,47,65
5
Purchase Budget:
Particulars April May June July
Budgeted Sales Volume 36500 29200 32850 43800
Budgeted Production Volume 18940 29930 35040
Cups required per unit 2 2 2

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Total Cups Required 37880 59860 70080
Add: Closing Inventory of Cups 35040 39420 52560
72920 99280 122640
Less: Opening Inventory of Cups 43800 35040 39420
Budgeted Purchase Volume (in units) 29120 64240 83220
Cups Cost per unit $44.00 $44.00 $44.00
Total Cost of Cups
$12,81,28
0
$28,26,56
0 $36,61,680
Vanes required per unit 3 3 3 3
Total Vanes Required 56820 89790 105120
Add: Closing Inventory of Vanes 52560 59130 78840
109380 148920 183960
Less: Opening Inventory of Vanes 65700 52560 59130
Budgeted Purchase Volume (in units) 43680 96360 124830
Vanes Cost per unit $58.00 $58.00 $58.00
Total Cost of Vanes
$32,95,56
0
$52,07,82
0 $60,96,960
Budgeted Direct Material Purchase
$45,76,84
0
$80,34,38
0 $97,58,640
Direct Material Budget:
Particulars April May June
Total Cups required for Production 37880 59860 70080
Cups Cost per unit $44.00 $44.00 $44.00
Total Cups Cost
$16,66,72
0
$26,33,84
0 $30,83,520
Total Vanes required for Production 56820 89790 105120
Vanes Cost per unit $58.00 $58.00 $58.00
Total Vanes Cost
$32,95,56
0
$52,07,82
0 $60,96,960
Budgeted Direct Material Cost
$49,62,28
0
$78,41,66
0 $91,80,480

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Answer to Part B:
Introduction:
The report is prepared to address the concerns of the sales manager of Heidegger Pty
Ltd of the new manufacturing facility. Making investment in new production facility will
enable organization to manufacture anemometers that is used in the production of wind
power energy generated equipment. The current market for the equipment of alternative
power generation is uncertain and volatile and in light of this volatility and uncertainty,
introduction of new manufacturing facility will help in addressing such issues. There are two
parts in which the manufacturing will be carried out under this facility, the assembly will be
purchased and the assembly process that is somewhat labour intensive will be significantly
automated (Bromwic and Scapens 2016). Furthermore, the impact of intended investment in
the new production capacity has been evaluated that is supported by relevant calculations.
Discussion:
The new manufacturing facility is implemented with the deliberation of reduction in
material cost and direct labour cost. However, it is projected that the new manufacturing
facility will increase the fixed manufacturing overhead resulting from increased investment
made in the production facility. For the preparation of various budgets, Heidegger Pty Ltd
will make use of flexible budgeting formula. Some of the budgets that are prepared include
direct labour budget, direct material budget, direct labour budget, cost of goods manufactured
statement, cash collection from debtors account and budgetary income statement. There is
likelihood that fixed manufacturing overhead will increase by 50% and reduce labour and
direct cost by 25% due to increased investment in production capacity (Tappura et al. 2015).
From the sales budget, it can be seen that the budgeted sales revenue initially reduced
from $ 134685000 to $ 121216500 and thereafter it increased to $ 161622000. Volume of

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budgeted production has increased significantly from 18940 in first month of operation to
35040 in third month of operation. In addition to this, there is considerable increase in
budgeted direct labour cost from $ 2272800 in month of April to $ 4204800 in month of June.
It is depicted from the production budget that the budgeted volume of production has
increased considerably. On other hand, the budgeted sales volume has initially reduced from
$ 36500 to $ 29200 and further the volume has increased significantly to $ 43800. The total
cost of cups has increased to $ 3661680 as against $ 1281280 initially. Furthermore, there has
been phenomenal increase in budgeted direct material purchase from $ 4576840 to $ 8034380
and further to $ 9758640. Therefore, it can be inferred from the analysis of several budgets
that with the introduction of new manufacturing facility, there is significant increase in direct
material cost, direct material purchase, direct labour cost, production volume and sales
volume (Mårtensson et al. 2016).
The budgeted manufacturing overhead has increased from $ 54741854 to $ 60747655
as revealed by the manufacturing overhead budget. It can also be noticed that direct labour
hour and indirect labour cost has increased since the month of operation (Kokubu and Kitada
2015). Furthermore, there has also been increase in total and variable maintenance cost.
In addition to this, the collection from debtors has initially increased from $
117073800 to $ 126603900 and thereafter the value has reduced to $ 108286470. The cash
payment for administration and selling expenses, the amount stood at $ 31031550 in first
month of operation to $ 23980500 in second month of operation and the amount stood at $
27853515 in third month of operation.
The cash budget prepared by organization depicts the net cash generated from
operating, financing and investing activities. Net cash flow from operating activities has
increased from $ 26275756 in first month of operation to $ 31545554 in second month of

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operation and thereafter it has reduced drastically to $ 4807305. No cash flow has been
generated from financing activities in second and third month of operations. The closing cash
balance has increases month on month from $ 27454706 to $ 40020261 and further to $
44827566.
Now, the value of net operating income will form the basis whether the project should
be undertaken or not. It can be seen from cost of goods sold manufacturing statement that the
cost of goods manufactured has increased. However, the per unit cost of goods manufactured
has reduced. There has been increase in gross profit along with increase in net operating
income. Nevertheless, the total amount of net operating income is negative (Wouters and
Kirchberger 2015).
Conclusion:
From the evaluation of new manufacturing facility in terms of sales volume and
material and labour cost, it can be seen that there is no change in percentage of sales made.
Moreover, fixed manufacturing overhead has increased. Therefore, it would not be viable to
undertake investment in new manufacturing facility as the total net income generated is
negative.
Answer to Part C:
Budget preparation can have considerable impact on the behaviour of human
and overall performance of organization. The approach of imposed budgeting involve senior
level management who has the responsibility of facilitating the process of decision making by
setting parameters for achieving desirable targets. Lower or middle level employees are
involved in the computation of budgetary elements but have little say in the decision making.
Under this method, the management does not make effective human resource utilization.

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Effective budget requires input in the form of financial and non financial information from all
the departments so that it covers broad range of aspects. This would make the budgetary
system reliable. Imposed budget might permit much budgetary slack if such budgets are not
properly scrutinized and such slack would create waste and inefficiency (Chiwamit et al.
2017). Therefore, before accepting the outcomes of such budgets, it is required that such
budgets should be reviewed carefully.
Participatory approach of budgeting on other hand involves active participation of
employees at all levels from different departments. Such budget intends to provide benefits in
terms attitude and performance of preparers of budgets. The implications of participatory
budget are measured in terms of congruency of goals, communication and motivation. There
is increased involvement from employees and increased flow of communication because of
participation of employees from different level of management. Organization is able to set
realistic targets by preparing a well designed budget involving employee’s participation.
Participatory budgetary approach helps in encouraging goals congruency and prevention of
any undesirable behaviour on part of employees (Chenhall & Moers 2015). Moreover,
behaviour implication in terms of motivation is generally higher when there is participation
from individual employees in setting his or her budgetary goals.
Analyzing both types of budget that is imposed as well as participatory budget, it can
be inferred that behavioural concerns of employee are addressed using the later budgetary
approach. The reason is attributable to the fact that the imposed budget does not facilitate
flow of communication between employees of different departments. Favourable outcome
will be produced by budget if the preparation of budget involves employees from upper to
lower level of management along with staffs and employees. Participatory budget will help in
addressing the issues experienced by the employees at behavioural level. In addition to this,
the performance of managers is evaluated by using the participative approach. Therefore, the

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preparation of budget is considered desirable if it involves participation from top as well as
lower level of management. Budgets should be created in such a way that it receives
contribution from management in preparation of budget. Detailed budgeted data is provided
if the participation is sought from subordinates who are involved in day to day operations
(Cleary 2015).
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