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Key Topics
- Question
- Answer
- Introduction
- Master budget
- Sales Budget
- Direct Materials Budget
- Production Budget
- Manufacturing Overhead Budget
- Selling and Administrative Budget
- Capital Acquisition Budget
- Cash Budget
- Budgeted Financial Statement
- Comparison of Top Down and Bottom Up approach to budgeting procedure
- Top-down approach-
- Bottom-up approach
- Top down Budgeting in Atlas Pearl Ltd
- Comparative data analysis of Actual and Budgeted Income Statement for 2018 and 2019
- Conclusion
- Reference List
Question
1- Write a note on Managerial Accounting within 3000 words with references to APA.
Answer
Introduction
Master budget is accumulation of all subordinate level budgets in which organization's different utilitarian territory and cost identified with the exercises and financial arranging has been made. Budgeting is identified with all exercises which are imperative to maintain the business. Diverse organizations pursue distinctive system to get ready budget. A few necessities are there which are expected to fuse while getting ready for budget and plan control strategies for it. Amid planning of budget for any association there are a few elements ought to be kept into the mind like generation limit of the organization, sales of item, acquisition of material accessibility of HR and all ought to be adjusted so that association's objective could be accomplished in a well way. So, it is important to include all departmental go to recognize the issue where their dept is falling behind and give answer for the equivalent.
Functional budgeting cannot be finished without mediation of other individuals. Management officials are better individual to comprehend their specialization upsides and downsides of their specialty. They realize what could be the better thought for approaching day so practical budgeting will accord that. So, budget holders are focusing more on that part in which they are included.
There are diverse factors featured in superior level budget. This report depends on to break down those elements. This likewise incorporates near examination of best down and base up way to deal with procedure of budgeting alongside points of interest and burdens may emerge while applying those philosophy. In furtherance to this, the report additionally incorporate utilization of budgeting methods in ATLAS PEARLS LTD(APL).
Master Budget
Budget is financial planning for organizational activities. All operational and functional departments prepare their individual budget for their own department including specific requirement. Master budget is sum of all divisional budgets that is prepared by individual department (Weygandt, Kimmel & Kieso, 2015). The goal of master budget is to achieve organizational goal within budget which is specified for each activities. This is done once in a year. It can be considered as important planning tools by which top-management can decide profitability, asset, liabilities and current situation position of the organization so that they can do planning for future. It helps to control department and accountability overall can measure performance of department and identification of those points where improvement can be done. It includes individual department accounts which ensure that financial division has been properly made according to requirement. Employee performance measurement can be done by comparing budgeted performance and actual performance. If actual performance is lower than budgeted performance then it can be assumed that there are possibilities for improvement and if it is higher than it will increase employee motivation for work which can be reason for growth. It indicates total budget of company by that a company’s earning is to be identified and how many expenses should be done in which department (Nguyen et al., 2017). It can identify the risk related to department and can take preventive measure for the same. Example- If a department is not performing well and expenses for the department exceeds the budget. From this comparison it can be assumed that there are some problem which department is facing so there must be some preventive measure is required to be taken. Every organization is planning their goal with short-term, mid-term and long term basis. Master budget should target long-term goal and collect resource for the same. It can help to measure continuous improvement process for organization. By comparing budgeted cost Vs actual cost of previous to current year. With several advantages there are some disadvantages too. Those are department have to accept budget allocation and do planning within budget. There will be chances that budget allocation for specific area may be skipped and it may hamper daily production. It is not easy to modify if any small changes is required there might be possibilities that entire budget have to change which is very lengthy and tedious job. So before preparing budget it is to be kept in mind that minor details are being included (Narayanaswamy, 2017).
Element of master budget.
Sales Budget
By sales budget one can estimate units to be sold and at what price. From that total earning can be calculated. This budget is help to understand organization’s capacity how much they can achieve. Depending upon which other budget is also calculated. The most critical part of the budget is to predict how much units organization could achieved , what will be the price so that organization could ear profit and how much what type of discount should be given so that organization could sustain their business and get competitive advantages (Millo, Barman & Hall, 2016). The factors depending upon which budget can be prepared are market demand estimation of product, how much to produce to meet demand, Production capacity of unit, availability of material, industry analysis.
Direct Materials Budget
This budget includes the requirement of material to produce estimated sale unit. This budget depends upon the sales budget. It is produced based on monthly and annual basis. This budget is fluctuating in nature sometimes actual material exceeds budgeted material due to some reason. So that this budget should be prepared carefully keep in mind future sales unit and material requirement for the same. It may exceed budgets and there should be reason behind it otherwise it would should wrong reflection of excess budget or lower budget which may hamper overall master budget (Kaplan & Atkinson, 2015). Material budget includes inventory at beginning of the year, inventory to be maintained at end of year and buffer stock throughout the year
Production Budget
This budget determined product produced in that organization. It depends upon the sales budget. It includes the sales forecast and quantity of finished product which is required to meet market demand in that time. It is used to do material planning system and to keep under pressure manufacturing system to produce more with quality. It is done either monthly or quarterly.
Manufacturing Overhead Budget
This budget is not directly related to direct labour and direct material cost. This is the budget for other cost related to manufacturing. This budget may include up-gradation of manufacturing process, technical up-gradations, machineries, process developments etc. This cost in included into cost of goods (Heitger& Greer, 2018). This information is important as there is chances to lowering down the cost otherwise it may incur largest portion of master budget which may not be so much important.
Selling and Administrative Budget
This is the budget related to cost other than manufacturing cost. It includes department like sales, marketing, facilities which does not have direct impact on manufacturing unit but it is important to do production. It is related to sales promotion, advertisement, market research, electricity, human resources activities. It is opposite to production cost but not less important to ignore the matter. It can incur the cost more than production cost (Handy & Polimeni, 2017). Manager is doing budgeting in such manner that expenditure can be low as possible as minimum by altering different activities.
Capital Acquisition Budget
The plant, machinery and equipments which are required for product need regular maintenance. If a company is targeting higher sales unit to produce then proper measure also be taken regarding those things. This may be done by the way to upgrade machinery or to replace machine and increase capacity. Therefore careful budget has to be done according to sales target so that this can be achieved without interruption. Budget for maintenance, repairing or replacement of machines, increase the production unit should be included into the master budget (Greenberg & Wilner, 2015). Another concern is that if a machine is purchased and delay deliver is there so master budget should include this. There may be part payment and full payment considering contract agreement muster budget is to be prepared.
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To do smooth business organization required cash any point of time so this budget ensures the cash required for poor planning during the preparation of budget. Based on sales budget expected receipts and expect payment has been derived so that it can be understood that organization should borrow any loans or not to fulfil the requirement. Performance based salary also be part of that budget so this is also be included along with emergency requirement (Epure, 2016).
Budgeted Financial Statement
It includes entire set of financial statement considering payment cash inflow and cash outflow of an organization. It includes income statement, balance sheet, cash flow statement, earning statement etc. (Butler & Ghosh, 2015). This considered combination of financial result, financial position, and cash flow statement of organization and also can predict future financial aspects of organization. This can help to prepare a new budget model and also help to budget maker for preparing budget. Each of the elements of budgeted financial statement are explained below with proper justification:
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Income Statement- Income statement or Profit or Loss Statement is one of the financial statement that is prepared for any business enterprise for a given period of time. This particular statement takes into account incomes and expenses of Business Corporation and reveals the net profit or loss for stipulated time frame. There are specific items that are present in the Income Statement and these items are revenue, tax expenses, total expenses and profit or loss.
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Balance Sheet- Balance Sheet is one of the financial statement that is prepared for a business and takes account assets and liabilities. In asset section, several components are included such as cash and cash equivalents, Goodwill, investments and property. In liability section, certain components are included such as trade payables, financial liabilities as well as current tax liabilities and loans payable. Equity takes into account retained earnings, additional pay as well as capital stock.
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Comparison of Top Down and Bottom Up approach to budgeting procedure
There are two type of approaches by which a budget can be prepared. One is top-down approaches and second is bottom-up approaches. Whatever budget procedure is being followed different activities and cost incurred by activities are determined considering total earning, profit, loss the budget is allocated to the departments. There are advantages and disadvantages for every approach which have been discussed below:
Top-down approach-
Financial planning and decision taken by higher authority by own without interference of lower management. Then this allocation is being distributed to departments and department head have to plan within that budget. Top-down approach begins with bigger picture as it breaks down from there into smaller segments.
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Advantages- Advantage of this approach is there no involvement of lower management so manager could give more attention to day- to- day activities. More concentrate on development of departmental growth. Master budget is based on overall organizational profit and planning with which lower management have nothing to do (Appelbaum et al., 2017).
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Disadvantages- Disadvantage is being higher management it is impossible for them identify specific work related to daily activities. Being an employee who are engaged with them they can only identified those thing (Aly, 2016). As specific activities are related to daily work there might be possibilities of losing production hours.
Bottom-up approach
Financial planning is being done by individual departmental head according to their need by considering specific requirement related to the department. Then budget is sent to higher management for checking and approval. If budget is approved it included into master budget otherwise it is sent to department for checking and revision. Bottom-up approach starts with elementary modules and then compile it for operating the data as it comprises in the data structure.
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Advantages- Advantage of the process is specific need is identified by department head and financial share related to activities. These costs being included to the budget so that daily work process could not hampered. One of the benefit of bottom-up approach is to increase motivation because of the ownership of the budget. This budget aims at providing better information. It increases understanding of the managers as well as commitment level. By using this approach, there will be better communication within the departments. It is the responsibility of the Senior Managers to concentrate on this strategy as it proves fruitful for any business enterprises.
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Disadvantages- Disadvantage is in this process manager give concentration on their department welfare they do not bother organization as whole. After sum up all department budget there might be possibilities that this could exceed overall budget of organization. If management want to apply this approach, they must do proper scrutiny of budget so that allocation is justified. By using this approach, Senior Managers may resent loss of control. To add further, bad decisions from unexperienced managers can be treated as one of the limitation on using this approach.
Top down Budgeting in Atlas Pearl Ltd
The idea of Top Down methodology can be connected in the budgeting routine with regards to the organization from the earliest starting point of the readiness of the budget through the choice which speaks to the all-out consumption of the organization (Atlas Pearls.2019). Using this top down methodology, the organization can without much of a stretch estimate the figures of sales which will be resolved through breaking the extensive classes of items into littler parts. Using this method, the organization can without much of a stretch decide the elements, for example, the channel for sales, geological areas, different classifications of clients and the classes of existing clients who assumes an essential job creating sales income of the organization. This methodology is viewed as appropriate for the Atlas Pearls Ltd on the grounds that it will assist the organization with determining the zones for producing its income and apportion budget as needs be by setting factors on needs.
Comparative data analysis of Actual and Budgeted Income Statement for 2018 and 2019
The statistical data acquired from the above expressed statement expresses that the income for Atlas Pearls Ltd is foreseen to achieve development by 10% though the expense of income is foreseen to increment by 8% prompting extreme development in the gross benefit by $6009206.26 (Atlas Pearls.2019). With an expansion in costs by 2% the anticipated net pay of the organization may ascend to $1483130.38 from the real figures posted in 2018 of $2034099. The business amid the 2018 financial year has confronted genuine financial hazard which is expected the organization's managing the essential creation which incorporates the reproducing and raising of great clams which is utilized in the generation of pearls (Atlas Pearls.2019).
In any case, the financial hazard is fundamentally connected with the exercises that happens as a result of the time between the consumption made by the organization in the generation procedure and the acknowledgment of the income in the wake of moving the item (Atlas Pearls.2019). The organization needs to guarantee that it ought to have adequate measure of capital to proceed with its activity immediately and keep a steady cash flow inside the task of the organization.
Looking at the financial explanation of the organization as for the financial report of the year 2018 and an anticipation of the organization’s financial articulation in the year 2019, it tends to be resolved that the organization has the competency to meet the future necessities of the organization (Atlas Pearls.2019). The projected or anticipated financial explanation of the organization estimates a higher income in the upcoming year and through the report it can in all likelihood be resolved that the organization can satisfy its obligations and can improve its development.
Conclusion
On a concluding note it can be said that, through the investigation of the organization's financial execution, the organization can make utilization of the top down methodology using different full-scale monetary elements which will help the organization to conjecture the income created from the sales and the productivity of the organization. The organization by utilizing the top down methodology lessens the danger of different market vulnerabilities which emerge in the activity of the organization through different key arranging. Atlas Pearls Limited should use top-down approach in order to reduce risk and survive in this competitive marketplace for smooth functioning of business enterprise. Proper strategic planning should be used by the management for future analysis purpose.
Reference List
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Aly, I. (2016). Comparison of students’ performance in a managerial accounting course taught in blended learning, traditional classroom, and online setting. Quarterly Review of Business Disciplines, 2(4), 325-336.
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Appelbaum, D., Kogan, A., Vasarhelyi, M., & Yan, Z. (2017). Impact of business analytics and enterprise systems on managerial accounting. International Journal of Accounting Information Systems, 25, 29-44.
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Atlas Pearls. (2019). Retrieved from https://www.atlaspearls.com.au/home/
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Butler, S. A., & Ghosh, D. (2015). Individual differences in managerial accounting judgments and decision making. The British Accounting Review, 47(1), 33-45.
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Epure, M. (2016). Benchmarking for routines and organizational knowledge: a managerial accounting approach with performance feedback. Journal of Productivity Analysis, 46(1), 87-107.
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Greenberg, R. K., & Wilner, N. A. (2015). Using concept maps to provide an integrative framework for teaching the cost or managerial accounting course. Journal of Accounting Education, 33(1), 16-35.
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Handy, S. A., & Polimeni, R. S. (2017). Concept Mapping-A Graphical Tool to Enhance Learning in an Introductory Cost or Managerial Accounting Course. Journal of the Academy of Business Education, 18.
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Heitger, L., & Greer, O. L. (2018). FORENSIC ACCOUNTANTS TO THE RESCUE: A good forensic accountant with experience in cost/managerial accounting has the ability to save your organization's reputation and finances. Strategic Finance, 99(9), 48-54.
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Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
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Millo, Y., Barman, E., & Hall, M. (2016). Accounting measurement tools and their impact on managerial decision making. economicsociology_theeuropean electronic newsletter, 17(2), 17-23.
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Narayanaswamy, R. (2017). Financial Accounting: A Managerial Perspective. PHI Learning Pvt.Ltd..
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Nguyen, T. T., Mia, L., Winata, L., & Chong, V. K. (2017). Effect of transformational-leadership style and management control system on managerial performance. Journal of Business Research, 70, 202-213.
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Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
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