Reference no: EM131806045

Problem

Minh Lam Company intends to start business on 1 January. Production plans for the first four months are as follows:

Each unit requires 2 kilograms of material. The company would like to end each month with enough raw material inventories on hand to cover 25 per cent of the following month's production needs. The material costs $7 per kilogram. Management anticipates being able to pay for 40 per cent of its purchases in the month of purchase. They will receive a 10 per cent discount for these early payments. They anticipate having to defer payment to the next month on 60 per cent of their purchases. No discount will be taken on these late payments. The business starts with no inventories on 1 January.

Required

Determine the budgeted payments for purchases of materials for each of the first three months of operations.

Minh Lam Company is preparing a master budget for the coming year. At present senior management are reviewing the inventory policies.

Which budgets would policies concerning the level of inventories affects? Why?

Discuss the potential issues arising for an entity if it takes a budgetary approach in which budgetary data are imposed on business unit managers by the CEO. Contrast this with an approach whereby the budgetary data is developed in a more participatory environment.