Preparing A Basic Master Budget And Addressing Concerns

1. Prepare a basic master budget. The general description and the data for the assignment is to be obtained from the associated assignment data file.

2. Research a behavioural and communication issue related to budgeting and performance evaluation

3. Write a brief report addressing the Sales Manager’s concerns, using some of the concepts covered in Topic One Introduction to management accounting.

Preparation of basic master budget:

The report is prepared for discussing the impact of investment made by the production manager of Jamini Pty Ltd in the new manufacturing capacity. All the expenses relating to new investment are done by using a flexible budgeting formula. The budget preparation for investing in new manufacturing facility involves production budget, sales budget, direct labour budget, purchase budget, direct material budget, manufacturing overhead budget, cash budget, cash collection from debtors account, cost of goods manufactured statement and budgetary income statement (Benade et al. 2017). 

Any amount of cash shortage developed in the investment of project will be covered by borrowing that is repaid with the interest is repaid. While preparing the budget, sales manager of company is also considering the possible outcome of the negotiation related to tariff with the production manager. It is predicted that making investment in new manufacturing facility will enable the company to manufacture two major parts in house. The assembly process of manufacturing facility is somewhat labour intensive in the current scenario. Investment in new manufacturing facility is expected to automate the assembly process (Bromwich and Scapens 2016). Moreover, it is indicated by the investment made in new facility that there will be reduction in direct labour and direct material costs. However, due to increased investment made in production capacity, there will be increment in fixed manufacturing overhead.

It can be seen that investment in new manufacturing capacity initially decreases the budgeted sales revenue from $ 153600000 to $ 13824000 and eventually it increases to $ 184320000. The budgeted production volume is increasing continuously from 20800 units to 38400 units. There is increase in budgeted labour cost from $ 3120000 to $ 5760000. Moreover, the budgeted direct material purchase is also increasing to $ 11750400 as against $ 5529600. The cost of budgeted direct material is increasing from $ 5990400 to $ 11059200. There is also increase in manufacturing overhead to $ 71175289 from $ 62500444.

With the implementation of budget by investing in new manufacturing facility, total amount collected from debtors is decreasing from $ 155080900 to $ 129638400. When looking at cash budget, it can be seen that there is considerable increase in net cash flow from operating activities from $ 49774956 to $ 85693356 respectively. However, there has not been wide fluctuation in closing balance of cash with balance standing at $ 51774956 to $ 75979044 and further to $ 66185536 respectively. In addition to this, with the implementation of new manufacturing facility, there is considerable increase in cost of goods manufactured from $ 71610844 in the initial month to $ 242386844 in the later month. However, there is decline in cost of goods manufactured per unit from 3442.83 to $ 2291.52.

The net operating figure generated from preparation of budgetary income statement is negative and the value stood at -$ 7620222. Since, the net operating income generated by the new manufacturing facility is negative, it is concluded that it is not feasible to implement new facility and should not be opted for.

Participative approach is a process of budgeting where people impacted by budget are actively involved in budget creation. Budgets created under this bottom up approach are more achievable and they are better for morale and employees contribute to creation of budget by using great efforts (Shields 2015). High level of strategic considerations is not taken into account for preparation of budget and therefore, it is required by management to provide employees with necessary guidelines concerning overall preparation of budget. Participatory budget is considered as self imposed and a team based management philosophy are fostered that helps in effective functioning of organization (Van der 2016). Since the budget preparation is done on participative basis, this leads to involvement of many employees that is middle, lower and senior level management. Such type of budget helps in increasing the commitment and understanding and better process of communication. Therefore, there will be increased participation on part of employees and increased contribution towards development of budget. In addition to this, there will be more accurate preparation of budget as budget is prepared by those having best knowledge of their specific areas of operation (Suomala et al. 2014).

Imposed budget on other hand is considered as non participative or authoritative budget as it does not allow for the ultimate holder of budget in participating the process of budgeting. This type of budget is imposed by upper level of management by establishing the parameters according to which budget is established. Lowe level employees do not contribute much and have little input in setting overall organizational goals. The reason is attributable to the fact that they are entitled to perform only the budgeted based calculations that are consistent with the directives (Lavia López and Hiebl 2014). It can be seen that the budget prepared by Jamini Pty Limited uses a flexible method, but the outcome of budget has negative impact on net operating income of company. Such outcome is not favourable and it will not be taken into consideration by production and sales manager. Participative budget on other hand plays an influential role in facilitating communication by determining the need of management for purpose of decision making and cost control (Sintomer et al. 2016). Moreover, they help in addressing the behavioural needs of company as it makes extensive use of human resources. Since preparation of budget involves coordination of non financial and financial planning for satisfying objectives and goals of organization, effective budget reparation should receive contribution or input from all sources.  

Therefore, if the budget would be prepared by involving all lower level employees who have in depth knowledge about the manufacturing facility would have generated favourable outcome. This is so because they would have considered all the parameters impacting the operation and preparation of budget.

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