Question 3 (7 marks)

a) Why do successful companies tend to use the bottom-up approach to establish a master budget? (2 marks)

b) Green Tea's data show the following information for the financial year, beginning July 2020:

	July	Aug.	Sept.	Oct.	Nov.
Estimated sales (units)	25,000	25,000	27,000	27,500	28,000
Sales price per unit	$31	$31	$31	$31	$31
Direct labour per unit	$1.75	$1.75	$1.50	$1.50	$1.50
Labour rate per hour	$21	$21	$24	$24	$24

New machinery will be added in September. This machine will reduce the labour required per unit and increase the labour rate for those employees qualified to operate the machinery.

Finished goods inventory is required to be 20% of the next month's requirements. Direct material requires 2.5 kg per unit at a cost of $5 per kg. The ending inventory required for direct materials is 20% of the next month's needs. In July, the beginning inventory is 3,750 units of finished goods and 13,125 kg of materials.

Required:

i) Prepare a production budget for the first quarter of the year (i.e. July - September). (2 marks)

ii) Prepare a direct materials budget for the first quarter of the year (i.e. July - September), to include total direct material purchases ($). (3 marks)