Preparing the Master Budget for Colombo Industries

Please see the attached file.

Columbo Industries Limited manufactures a single model trench coat sold throughout Canada. Projected Sales in units for the first five months of the 2004/05 financial year are as follows...

July 35,000
August 20,000
September 15,000
October 8,000
November 6,000

The following information relates to Combo's production and inventory policies and balances:

1. Finished goods inventory is maintained at 80% of the following month's sales. Finished goods inventory at 1 July 2004 was 28,000 units.

2. Two materials are required for each trench coat manufactured, as follows:

Direct Materials Metres per unit Cost per metre
Polyester 5 $8
Lining material 3 2

Raw materials inventory is maintained at 10% of the following month's production needs. Inventory at 1 July 2004 was 17,000 metres of polyester and 10,200 metres of lining.

3. Direct labour used per unit is two hours. The average rate for labour is $15 per hour.

4. Overhead each month is estimated using a flexible budget format, with direct labour hours as the basis for variable costs. A summary of expected overhead costs is at follows:

Fixed - cost Component Variable - cost Component
Factory supplies $1.00
Energy supplies 0.75
Shop maintenance $3,000 0.50
Supervision 4,000
Depreciation 60,000
Taxes 5,000
Other 10,000 2.00
Total $82,000 $4.25

5. Selling, general and administrative expenses are also calculated on a flexible budget basis based on the number of units sold. Cost estimates are as follows:

Fixed-cost component Variable-cost component
Salaries $18,000
Commissions $3.00
Depreciation 22,000
Shipping 0.75
Other 10,000 1.50
TOTAL $50,000 $5.25

6. Each trench coat sells for $85

7. All purchases are made in cash. All sales are on account. Collection of accounts receivable is planned as follows: 90% in the month of sale and 10% in the month following the month of sale. The accounts receivable balance at 1 July 2004 is $145,000, all of which is collectable. The cash balance at July 2004 is $202,000.

Required

Prepare the following portions of the operating master budget, by month, for the first financial quarter of 2004/05:

a. Sales budget
b. Production budget
c. Direct materials budget
d. Direct labour budget
e. Overhead budget
f. Selling, general and administrative expense budget
g. Cash budget
h. Suppose Columbo's management believes that unseasonably warn weather in September and October could cause its sales in units to differ from the original projections as follows:

June 35,000
July 20,000
August 10,000
September 6,000
October 6,000

Explain how these fluctuations in sales will affect the other portions of the master budget developed in the previous requirement. What are the implications for the importance of forecasting sales accurately?