The Master Budget Problem -
Columbo Company manufactures a single model trench coat sold throughout the United States. Projected sales in units for the first five months of 2005 are as follows:
January 40,000
February 25,000
March 20,000
April 13,000
May 11,000
The following information relates to Columbo'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 January 1, 2005, was 32,000 units.
2. Two materials are required for each trench coat manufactured, as follows:
Direct Materials Yards per Unit Cost per Yard
Polyester 5 $8
Lining Material 3 2
Raw materials inventory is maintained at 10% of the following month's production needs. Inventory at January 1, 2005, was 14,000 yards of polyester and 8,400 yards of lining.
3. Direct labor used per unit is two hours. The average rate for labor is $9.50 per hour.
4. Overhead each month is estimated by adding the fixed cost component to the variable cost component. Direct labor hours is used as the basis for variable costs. A summary of expected overhead costs is as follows:
Fixed Cost Component Variable Cost Component
Factory supplies $1.00
Utilities 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 by summing the fixed cost component and the variable cost component. The variable cost component is 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; 10% in the month following the month of sale. The accounts receivable balance at January 1, 2005, is $145,000, all of which is collectible. The cash balance at January 1, 2005, is $202,000.
Required -
A. Prepare the following portions of the operating master budget, by month, for the first quarter of 2005:
1. Sales Budget
2. Production Budget
3. Materials purchases budget
4. Labor budget
5. Overhead budget
6. Selling and administrative budget
7. Cash Budget
B. Suppose Columbo's management believes that unseasonably warm weather in March and April could cause its sales in units to differ from the original projections as follows:
January 40,000
February 25,000
March 15,000
April 11,000
May 11,000
Explain how these fluctuations in sales will affect the other portions of the master budget developed in the previous requirements. What are the implications for the importance of forecasting sales accurately?