Managerial Accounting: Budgeting at Aeon Metals Ltd

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Assignment Title: Managerial Accounting
Date:
Word count: 3000
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Executive summary:
Budgets are those internal reports of a business organization which are prepaid to ensure
the best management, allocation, and collection of resources. This report is based on the
concepts of budgeting and going to be made to elucidate different functions of budgets. This
report is related to Aeon Metals Ltd and going to be prepared to elucidate the budgeting
functions of the company. The report will explain different elements of the master budget
and help to understand how the master budget of Aeon Ltd is related to each managerial
and operational aspect of the company. This report is elucidating comparative knowledge
about such methods in respect of Aeon Ltd. Practical skills of budget preparation are also
provided in this report which will helpful for the learner to clearly understand the process of
budget preparation and analysis.
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Table of Contents
Introduction:............................................................................................................................ 4
Question 1:...............................................................................................................................5
Question 2:...............................................................................................................................9
Question 3:............................................................................................................................. 13
Question 4:............................................................................................................................. 15
Conclusion:............................................................................................................................. 17
References:............................................................................................................................ 18
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Introduction:
This assessment is related with a wider topic budget and going to be made to describe
different aspects of budgets and budget preparation process. The report will be segregated
in four major parts and each part will explain different concepts of managerial accounting.
The discussion that is going to be delivered in the report will be based on Aeon Metals Ltd
and supportive in the understanding of the budgeting process of the company. In the first
part of the report, components of the master budget of Aeon Limited will be explained and
understanding of such components will deliver information about those problems that are
faced by corporate managers during budgeting. For effective budgeting, the company can
adopt the bottom-up or top-down framework of budgeting and this report will evaluate the
suitability of both methods to recommend the best method for Aeon Ltd. In the end,
problems of budget preparation will be described through the example of income budget
which will be made for Aeon Limited. Additionally, a comparative view of real figures of
2018 and expected figures of 2019 will be provided in respect of Aeon Limited.
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Question 1:
Budget:
It can be explained as a tool which is utilized to evaluate and estimate the future incomes
and distribution of resources on the basis of previous data and understanding. It is a popular
tool of managerial administration which helps to ensure that all activities are going to be
managed as per planned tactic and appropriate resources will be available for each business
activity on time (Tanwar, 2019). Also, it works to stop the additional absorption of
resources.
Master budget:
It can be explained as a combination of different small or departmental budgets which
covers concluded information of all other budgets. In large organizations like Aeon Ltd,
different types of budgets are prepared for different departments to ensure the proper
management of activities of each department and master budget concludes major
information of all such budgets (McFarlin, 2019). Thus, a master budget is an aggregation of
all budgeted estimates and covers cash forecast, all functional budgets, detailed financial
plan, and budgeted financial reports.
The master budget is highly useful in managerial decisions and works like a managerial plan
to execute the operational activities in a most advantageous manner. Aeon Limited is a
large company and several departments like production, financial management, human
resources, marketing and more are working to ensure the attainment of company goals. A
master budget of the company presents combine strategy for all departments and ensures
that business activities are going to be administered in an efficient way (Chand, 2019). Aeon
limited is utilizing the master budget and other budgeting functions to support the
managerial decision-making and gain sustainable growth.
Components of the master budget:
Components of master budget depend on the nature and size of the organization. A master
budget of small business will contain components like total income, production expenses,
sales and promotion costs, estimated cash and more. The master-budget of large
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organizations like Aeon metals Limited includes many components like functional budgets,
future plan, annual averages, and cash forecasting statement (Edmunds, 2018). A
descriptive view of components of the master budget of Aeon Metals Ltd is provided below:
(Figure: Master budget components)
(Source: by Author, 2019)
 Working-capital budget:
Mostly a working capital budget works as a capital budget which includes all information
about the capital arrangements of the company. Aeon Limited is a large company so
effective management of financial resources is necessary to ensure that enough funds are
available for each planned activity of business and absorption of funds is under controlled
(Chand, 2019). For instance, When Aeon Ltd going to invest the amount in new projects, the
impact of such investment on the overall capital level can be measured effectively.
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Master budget
componentsWorking-capital
budget
Production budget
Cash flow
forecast
Estimated income
reports
Other functional
budgets

 Production budget:
A production budget is prepared for the production department and includes detailed
information about the activities of the production department. Aeon Ltd is a leading
resource exploration company and different types of sub-budgets are included in the
production budget of the company (Edmunds, 2018). Production budget of Aeon Ltd
includes descriptive information about future needs for exploration resources, different
costs, production estimates, and projected new plans. Through this budget, activities of
production department can be managed in the most controlled manner to ensure maximum
yield from production activities.
 Cash flow forecast:
Cash resources are one of the most necessary requirements of each operational event of
business and paucity of cash creates a threat to the going-concern aptitude of the company.
This budget covers detailed information about estimated figures of cash-in and cash-outs
and, supports in logical disbursement of available resources (McFarlin, 2019). It is necessary
for the financial managers of Aeon Limited that all possible cash receipts and payments are
evaluated correctly to ensure the protection from adverse cash problems. Through the
effective and accurate cash-forecast, Aeon Limited can ensure that cash resources are going
to be absorbed in a controlled environment.
 Estimated income reports:
Estimation of future incomes is the popular practice among financial managers to improve
the organizational profitability up to the desired level. For instance, estimated income
report includes estimated figures of future income and expenses which are calculated on
the basis of previous experience and, it helps to execute the plans in an effective manner to
improve gains (Edmunds, 2018). Through the help of these income reports, Aeon Metals Ltd
can make beneficial decisions regarding the retained earnings, costs and incomes.
 Other functional budgets:
A master budget includes several types of information regarding different aspects of the
business. For instance, material requirements budget, overhead budget, revenue budget,
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investment budget, sales budget, demand budget and more can be made as per internal
requirements. These functional budgets work to manage the costs and incomes of relevant
business aspects in the most suitable way and ensure that business aims will be attained
timely.
Importance of master budget:
The master budget is a combination of operating, static, financial management and cash
budgets. It is very helpful in the most effective management of business activities to ensure
that business activities are going to be settled in the correct manner to gain maximum gains
from business operations. Cost control is a necessary element of managerial activities which
decides the direction and speed of future growth (Chand, 2019). A Master budget
statement is highly effective in controlling business spending to ensure that minimum
resources will be absorbed for maximum yield.
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Question 2:
Budget process:
Budget process or budgeting can be described as a set of some managerial steps that are
performed to create financial plans of the organization. It includes some practices of
evaluation, decision-making, and projections that are utilized to create accurate, relevant
and tactic budget for the organization to ensure the accomplishment of planned endeavors
(Fowles, 2018). A good budget process covers all aspects of business and helps to create the
most suitable and relevant budget for the entity. Some features of a good budgeting
process are provided below:
 Overall involvement:
Involvement of upper to junior level employees in budgeting is necessary to create a
suitable budget. Good coordination and communication among management and junior
staff ensure that management is aware of the ground level issues of business and, the
planned strategy will provide a realistic and immediate solution for such issues (Fowles,
2018).
 Relevancy and accuracy:
A good budgeting process cares about each factor which is associated with business nature
or process. Preparation of relevant and accurate budget provides easy solutions of problems
and supports to eliminate many serious problems at the initial stage.
 Control on costs:
Costs are main elements which are required to be considered during a budget process. A
well-managed budgeting process ensures that all costs are identified correctly and the
absorption of costs is under controlled (Tanwar, 2019). By controlling the costs at the most
suitable level, an organization can gain sustainable victory.
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The process of budgeting can be classified into the following two categories:
(Figure: Sorts of budget process)
(Source: By Author, 2019)
Top-Down approach:
As the name describes, this process is based on the managerial decision-making and, refers
that good budgeting decisions demand the high-level knowledge of analysis, estimation, and
selection, so budgets are required to be made by top level management. In this approach,
all budgeting decisions are taken by the senior level management and there is no
involvement of junior staff in the whole process (Techdifferences, 2018). As per the
assumptions of this approach, junior level and mid-level staff do not have sufficient
knowledge which is necessary to make accurate and Error-free budget so all decisions
should be made by the senior management after proper research, analysis, and
interrogation. There are numerous benefits that are associated with a Top-Down approach.
For instance, all decisions and analytical procedures are performed by the upper-level
management so absorption of time and costs remains lower (Smartsheet, 2019). Similarly,
strategies remain confidential and required changes can be made instantly. Some problems
are also associated with this method like, finalized strategies are delivered to junior staff so
execution of such strategies becomes complex for departments.
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Sorts of
budgeting
process
Top-Down budgeting
Bottom-Up budgeting

Bottom-Up approach:
The bottom-up approach is completely different from the first method as all processes
regarding budgeting are performed by the junior and mid-level managers. In this method,
functional level staff plays a crucial role in the whole budgeting process and works at all
steps of decision-making. According to the assumption of this approach, departmental
managers and functional staff has ground level knowledge about the problems of business
so the involvement of them in budgeting process will work to ensure that budgeted figures
and plans are relevant to the organizational structure (Smartsheet, 2019). Under the
Bottom-up method, departmental budgets are prepared by departmental managers and
delivered to senior management for review. After the review of proposed budgets, senior
management can recommend some changes and formulate the best suitable final budget.
This system helps to create a most relevant, realistic and logical budget for the organization,
but consumption of time and resources remains high (Techdifferences, 2018). Similarly,
conflicts of staff and limitation of managerial knowledge create quality compromise.
A comparative analysis of both methods is provided below:
Top-Down approach Bottom-Up approach
Advantages
 Reduced risk (Techdifferences, 2018)
 Efficient and strong management
 Well managed operation
 Enhanced communication among Top
and Junior staff
 Improved motivation
 More involvement of staff
Disadvantages
 Limited elucidation and creativity
 Reduces employee motivation
 Low level of relevancy with basic issues
 Time-consuming
 Changes are hard and complex
 Quality issues (Smartsheet, 2019)
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Suitability analysis:
Above explain is enough to understand that both methods of budgeting have some
advantage and cons so the selection of the budgeting process is required to be made with
enough analysis and research (Techdifferences, 2018). Aeon Metals Ltd is a leading
resource exploration company which is engaged in the exploration of several valuable
resources like cobalt, lithium, and platinum. As different departments are working in a
company, integrated and centralized decision-making will be most suitable for the company.
Similarly, resource industry demands the instant alteration in decided strategy to ensure
that organizational plans are accountable with market changes. Industry in which Aeon
Limited is working demands for the heavy investments in new projects so heavy managerial
skills are required for effective decisions. All these requirements of Aeon Limited will be
satisfied through Top-down approach is it is adopted with two-way communication
arrangements. Thus, the Top-Down approach along with two-way communication practices
will be most suitable for Aeon limited (Smartsheet, 2019).
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