HI5017 Managerial Accounting
Holmes Institute

Insurance industry - SUNCORP GROUP LIMITED

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Budgeting Analysis of SUNCORP Group Limited

Executive Summary
In the given assignment we have selected SUNCORP Group Limited for our purpose of preparation of Budget and budgeting analysis. We have prepared the budgeted income statement based on the data given to us in the assignment. We have selected the financial report for the year ending 2018 as a base year that is the last audited financials available and then based on the expected growth in the revenue and expenses of the company, Budgeted income statement of the company has been prepared. Further, we have been asked to compare the prepared budgeted income statement with the actual income statement for the last financial year ended June 2018. We were further required to comment upon the changes expected to be taken into place in the coming year ending June 2019 based on the expected events to be taken place in the company.

The company selected named SUNCORP Group Limited is a company based from insurance and banking sector, the Head office of which is located in Brisbane, Queensland, Australia. The company is one of the mid-sized banks of Australia and is one of the top insurance sector company located in Australia. The company was formed in the year 1996 by merger of Suncorp, Queensland industry Development Corporation and Metway bank.

You are required to prepare a report to comment on the budgeted income statement for the following Financial Year.

Introduction

In the given assignment we have discussed Master Budget and its various elements. There are several elements of the Master budget that were also discussed briefly in the assignment and are significant in preparation of Budgeted financial statement. We have further developed the budgeted financial statements of our selected company SUNCORP Limited based on the data given to us in the assignment.

Further, we have discussed the Top down and Bottom up approach of preparation of budgeted financial statement and also advised which one approach is favorable to our selected company SUNCORP Limited.

Provided further that, we have prepared a comparison report to compare the budgeted financial statements with the actual financial statements of the company for the last financial year ending June 2018. We have also given significant comments over changes expected to be taken place from the last financial year over the financial position of the entity.

a. An explanation of the elements of the Master Budget.

Main Body

Explanation of the elements of the Master Budget

Master budget refers to the budget that is an aggregation of all lower level budgets produced from different functional areas of the company. It includes the budgeted financial forecast of income and expenditure of the company, the cash flow position of the company and the budgeted statement of cash flows over the predefined period of time. Usually, the master budget is prepared for a fiscal year of the company (Jongbloed, 2008). A budget is prepared in advance so as to control the amount of expenditure incurred by the company and to set the standard performance of the company based on the estimations and past experience of the company. A master budget is a central management technique that assists management in managing the operations of the company.

The master budget consists of two broad sections that include financial budget and operational budget. Financial budgets consist of components that are broadly in relation to preparation of financial statements of the entity including statement of financial performance, statement of financial position and statement of cash flows of the entity. The operating budget involves individual components that are specific operations of the entity that are briefly described in the assignment. These sections have further many components that are as follows:

Components of Operational Budget:

• Sales Budget: Sales budget refers to the budget of estimated sales quantity at an estimated selling price. Different sales quantity has been estimated at different selling price by the company and the quantity at which the profitability of the company is maximum is chosen and accordingly, the sales budget is prepared.
• Production Budget: on the basis of quantity to be sold, expected production units are generally determined along with keeping of some spare stock in hand to meet the urgent demand. The production budget is therefore prepared to determine the cost of production and the units of production based on the input material, labor, and overheads. The budget determines the expected quantum of output by reducing normal loss from the input figures.
• Direct material purchase Budget: Based on the production budget, it is known that how many direct material units are to be purchased to produce the required output. Based on the input units, the producer negotiates with the supplier and orders the quantity of input at a price that is the least or best suits the producer. Based on the input price multiplied by the quantity, Direct material purchase budget is prepared.
• Direct Labor Budget: Direct Labor budget is again the budgeted labor cost to be incurred by the company on the estimated production units. Based on the production units determined in the production budget, we estimate all departmental labor hours over the units produced that is further multiplied with their wage rate per hour to determine the labor cost to be incurred for the given production units.
• Overhead Budget: It refers to the budget that allocates the overhead on some relevant basis. Based on the production units, the overhead expected from the different departments is apportioned. The best way to apportion the overheads is on the basis of Activity-based costing analysis. In activity-based costing analysis, the cost pool of all types of overhead is prepared and the cost activity is determined that is the relevant basis of apportionment of costs. The costs are hereby apportioned to the relevant departments based on the relevant cost activity identified.
• Selling and administrative expenses budget: The next is the cost occurred by the company in administration and selling activity. The administration costs occur in the office and the overall costs are apportioned to the relevant departments based on some relevant basis. The selling overhead is directly related to the sales units and can be allocated to the relevant department based on the sale of units by the concerned departments.
• Cost of goods manufactured budget: In the cost of goods manufactured budget, cost sheet is prepared where we aggregate the sum incurred on direct materials, labor and overheads and is used in identifying the cost per unit incurred by the company in manufacturing a particular product. This is also significant in setting the sale price of that product.

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Components of the financial budget include the following:

• Schedule of expected cash receipts from customers: In the schedule of expected cash receipts, we estimate the cash flows that can occur from the establishment of a particular project. This is useful in identifying whether a project is beneficial to be undertaken or not through identification of net present value of the company.
• Schedule of expected cash payments to suppliers: This is the cost of implementation of the project. The cost of implementation of a project refers to the present value of cash outflows occurred by the company in the implementation of the project.
• Cash Budget: Cash is a very important aspect for all the business organizations. The cash budget is maintained to ensure continuous availability of cash for significant purposes. Further, if a company maintains more cash, it has to bear significant costs related to it. So it shall be managed based on the requirements of the enterprise and some spare cash for emergency purposes (Sandu, 2009). The cash budget is prepared based on the difference between the source of funds and the application of the funds.
• Budgeted Income statement: Budgeted income statement is a statement of profit and loss of an organization prepared in order to estimate the gain/ loss that the company will produce from the conduct of operations over the specified period of time. The budgeted income statement is very significant since it sets the target profit that the company shall earn through effective and efficient business conduct.
• Budgeted balance sheet: Budgeted Balance sheet refers to the estimated statement of the financial position including the assets and liabilities that the company will have after a certain period of time say one year.
The companies perform budgeted financials as a standard to effectively measure their performance. These standards are compared in order to evaluate the performance in the specific sectors whether favorable or adverse and appropriate actions are taken in the sectors where the performance has gone adverse to rectify the position and uplift the performance of the entity.

b. A discussion about the comparison of top-down and bottom-up approach to the budget process and analyse which one is more suitable for your chosen company.

Comparison of the top down and bottom up approach to the process of budgeting

Top down and Bottom up are the two budgeting approaches that flow from top management to lower management and Vice Versa.
In the Top down budget approach, the senior management of the company creates a huge budget for the entire company based on which, the amounts are allocated to the individual departments and then the individual departmental managers form their individual budgets and that is how the budgeting flows from the top management to the operating level management of the organization (Anon, 2019). There are some pros and cons of both the budgeting approaches, in the top-down budgeting approach, it is the senior level management that devotes significant time in the preparation of the budget and the budgeting process does not require the significant time of the operational level managers (Fromhold-Eisebith and Eisebith, 2005). The major drawback of the top-down approach is that the people that were involved in the preparation of the budget may not be actually involved in the operations part and so they may not be aware of the actual things that are taken care of by then operational managers. The strategic managers may not consider the specific expenses required by the operational staff specifically for carrying out certain things that may later create problems for the departmental managers to continue with the operations of that department.

In case of a bottom-up approach of budgeting, the process of budgeting starts with the preparation of individual budgets by the operational managers and then the budget is sent upwards for its approval from the senior managers. The budget is then either approved or sent back for modifications and thereafter after aggregation of all the budgets, the master budget is prepared by the senior management. In this case, huge time is devoted by the operational level managers and very less time is spent by the senior level managers in the process of budget approval and aggregation of individual department budgets. This budgeting process flows from downwards to upwards (Phillips, et al., 2007). The major drawback associated with this approach is that this approach typically ends up with higher spending of amounts as compared to the top-down approach. Further, the bottom-up approach sometimes focuses larger on the specific department that deviates from the final objective of the company.

In our case of a selected company, as we know that selected company is a multinational firm consisting of operations in various countries and therefore it would be important for the Senior management to be accountable for the budgeting process. In case of multinational companies, generally, it is the top level management that prepares the financial budget of the company since a particular mistake can cause harm to the public in large. Keeping the facts in mind, it would be advisable for SUNCORP Limited to prepare their budgeted financial statements based on Top Down budgeting approach.

c. Based on the 2018 Annual Report, produce budgeted income statement for 2019 with the following changes: (i) Sales are projected to grow by 10%, (ii) Costs of Goods Sold are projected grow by 8% and (iii) Expenses are projected to grow by 2%.

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The budgeted Income statement for the year 2019 based on the given adjustments.

The budgeted income statement based on the adjustments given in the assignment is prepared here below:

In the above table, we have used the actual data of the past two years from the latest available audited financial statements available for the year ending 2018 (Anon, 2019). Further, based on the adjustments given, we have applied the adjustments to make changes in the actual financial statements for the year ending 2018 taking it as a base year and applied the given adjustments requiring sales to be increased by 10% and the cost of goods sold and other expenses to rise by 8% and 2% respectively. Each single item of the actual income statement of the company has been considered and has duly been given effect of the applicable adjustments. After the application of the adjustments given to us in the assignment we have also calculated the net profit after taxes of the company that is showing an increase of around 33.20% of profit from the current financial year that signifies that there are significant opportunities available for the company to increase its profitability. Also the rate of Income tax applied in the budgeted income statement has is taken to be same in as of the last years rate of income tax for the purpose of our comparison.

d. Present the Budgeted Income Statement for 2019 and Actual Income Statement for 2018. Compare the data and provide your opinion on the changes.

Comparison of the expected Budget with the actual Income statement of 2018 and the expression of opinion on the changes.

For the purpose of our comparison of the budgeted performance with the actual financial performance of the entity for the last financial year, we have taken the actual data and the budgeted data prepared for the upcoming year for the purpose of our comparison.

From the tale given above, it is clear that the revenue of the company for the upcoming year has been increased by 10%. This estimation of 10% rise in the revenue figures must have been given to us based on proper research (Anon, 2019). However, the company needs to work hard to make achieve the 10% rise in the revenue figures through an increase in their efforts in form of service quality, continuous customer support, and continuous feedback. This will no doubt increase the cost of sales of the company that has been budgeted by the senior management to be 8% increase in the cost of direct expenses (Bouckaert and Halligan, 2007). Further, the costs of indirect expenses should have been managed in the coming year but looking after the rating of inflation it is budgeted that the indirect expenses of the company in relation to fees and overheads will get a rise by 2 % that is nominal expectancy.

Based on the above budget the profits of the company are likely to rise by 33.21% over the last base year ending 2018. However it would be very difficult to achieve the above-targeted figures since the revenues of the company has been decreased from 2017 to 2018 by almost 11.17% and so to further enhance the revenue figures of the company, the management has to enter into new markets in order to diversify the area of its operations and give tough competition to their rival firms so as to enhance the revenue figures of the company back in the upcoming year 2019 (Anon, 2019). The company shall also be likely to enter into contracts with commercial vehicle firms and other public companies to get their vehicles and lives of their employees get insured with the products and services offered by the company.

Conclusion

In the above assignment, we have discussed different aspects of preparation and presentation of Master budget consisting of budgeted financial statements. We have prepared the budget of the selected company SUNCORP Limited based on the additional data given in the assignment with respect the expected revenues and expenses to occur in the coming financial year. Further, we have discussed the significant elements of the master budget and described them briefly. Also, we have discussed regarding the two approaches of budgeting that includes top down and bottom up approach of budgeting and also suggested which of the given budgeting approach is best suitable to the company we have selected.

Further, in the assignment, we have prepared a table showing a comparison of actual financial performance of the entity for the two previous years ending 2017 and 2018 along with the budgeted performance of the entity for the upcoming fiscal year based on the adjustments given in the assignments. On the basis of our comparison, we have also commented on the adjustment basis that might have been the reason behind the recommendation of such adjustment in the management's judgment for the upcoming budget and also the budgeted profitability. Apart from the budgeted performance, it is advisable for the firm to manage its cash flow position and financial position to maintain the company going concern and to protect itself from any harm in future by strengthening the financial position of the entity.

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