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    Preparing the Master Budget for Colombo Industries

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    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?

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    Solution Preview

    Please see the attached file.

    A.
    Columbo Industries Master Budget
    for Quarter Ending September 2004
    Sales Budget
    July August September Quarter Totals October November

    Sales Units 35,000 20,000 15,000 70,000 8,000 6,000
    Selling Price $85 $85 $85 $85 $85
    Sales Revenue $2,975,000 $1,700,000 $1,275,000 $5,950,000 $680,000

    Production Budget
    July August September Quarter Totals October
    Unit Sales 35,000 20,000 15,000 70,000 8,000
    Desired Ending Inventory 16,000 12,000 6,400 6,400 4,800
    Subtotal 51,000 32,000 21,400 76,400 12,800
    Less Beginning Inventory 28,000 16,000 12,000 28,000 6,400
    Production Total 23,000 16,000 9,400 48,400 6,400

    Materials budget- Poylester
    July August September Quarter Totals October
    Production 23,000 16,000 9,400 48,400 6,400
    Meters of Polyester (per unit) 5 5 5 5 5
    Total Required 115,000 80,000 47,000 242,000 32,000
    Desired Ending Inventory- Polyester 8,000 4,700 3,200 3,200
    Total Required 123,000 84,700 50,200 245,200
    Less Beginning Inventory 17,000 8,000 4,700 17,000
    Total to Purchase 106,000 76,700 45,500 228,200
    Cost Per Meter $8 $8 $8 $8
    Total Polyester Purchase $848,000 $613,600 $364,000 $1,825,600

    Materials Budget- Lining Material
    July August September Quarter Totals October
    Production 23,000 16,000 9,400 48,400 6,400
    Meters of Lining 3 3 3 3 3
    Total Required 69,000 48,000 28,200 145,200 19,200
    Desired Ending Inventory- Lining 4,800 2,820 1,920 1,920
    Total Required 73,800 50,820 30,120 147,120
    Less Beginning Inventory 10,200 4,800 2,820 10,200
    Total to ...

    Solution Summary

    The solution explains how the prepare a master budget which consists of Sales Budget, Production Budget, Direct Materials Budget, Direct Labor Budget, Overhead Budget, Selling and Administrative Expenses Budget and the Cash Budget

    $2.19

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