QUESTION 4

A. Excellent Sdn Bhd is preparing its budgets for the coming year. It expects to be able to sell 10,000 units of its only product, ExSmart, in January 2020. Sales are then expected to rise to 11,000 units in February and 14,000 units in March, and then remain stable for the rest of the year. Excellent Sdn Bhd aims to carry a finished goods inventory at the end of each month equal to 10% of the following month's sales. Each ExSmart takes four labor hours to make.

The company's 280 production workers are employed on contracts that require them to work a minimum of 160 hours per month and are each paid RM 1,280 per month. Production workers are highly skilled and require a minimum of one year's training. In short term, it is not possible to recruit any more production workers. Any labor hours required in excess of 160 hours per worker are made up by overtime that is paid at basic rate plus an overtime premium of 50%.

You are required to prepare, for the first three months of 2020:

1. A production budget, showing opening and closing inventories of finished goods.
2. A labor budget, showing both hours and labor cost.

B. The financial director has not discussed the proposed budgeting system with junior managers. He is considering imposing production and sales budgets upon them, without their involvement.

REQUIRED:

Explain the following approaches to budget setting and give two advantages of each approach:

1. A 'top down' (or imposed) approach.
2. A 'bottom up' (or participative) approach.