Budgets

James Manford, president of Photo Enhance Company, was just concluding a budget meeting with his senior staff. It was November of 20x4, and the group was discussing preparation of the firms master budget for 20x5. I've decided to go ahead and purchase the industrial robot weve been talking about. Well make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.

In response to a question about financing the acquisition, Manford replied as follows: The robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be purchased. Well finance these purchases with a oneyear $1,000,000 loan from Fin Bank and Best Company. Ive negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent, and interest payments will be quarterly as well. With that the meeting broke up, and the budget process was on.

Photo Enhance Company is a manufacturer of metal picture frames. The firms two product lines are designated as S (small frames; 5 7 inches) and L (large frames; 8 10 inches). The primary raw materials are flexible metal strips and 9inch by 24inch glass sheets. Each S frame requires a 2foot metal strip; an L frame requires a 3foot metal strip. Allowing for normal breakage and scrap glass, the company can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Beth Hurt, Photo Enhance's controller, is in charge of preparing the master budget for 20x5. She has gathered the following information:

1. Sales in the fourth quarter of 20x4 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x5 are expected to be 55,000 units.

2. Photo Enhance's sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The companys collection experience shows that 80 percent of the credit sales are collected during the quarter in which the sale is made, while the remaining 20 percent is collected in the, following quarter. For simplicity, assume the company is able to collect 100 percent of its accounts receivable.

3. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x5.

4. The production manager attempts to end each quarter with enough finishedgoods inventory in each product line to cover 20 percent of the following quarters sales.

5. Photo Enhance makes an attempt to end each quarter with 20 percent of the glass sheets needed for the following quarter's production. The company wants to have an inventory of 10,400 sheets at the end of 20x5.

6. Metal strips are purchased locally and the company buys them on a justintime basis. Inventory of metal strips is negligible.

7. All directmaterial purchases are made on account, and 80 percent of each quarters purchases are paid in cash during the same quarter as the purchase. The other 20 percent is paid in the next quarter.

8. Indirect materials are purchased with cash as needed. Workinprocess is negligible.

9. Projected manufacturing costs in 20x5 are as follow:

	S Frame		L Frame
Direct material:
Metal strips:
S: 2 ft. @ $1 per foot	$2.00
L: 3 ft. @ $1 per foot			$3.00
Glass sheets:
S: sheet @ $8 per sheet	2.00
L: sheet @ $8 per sheet			4.00
Direct labor:
.1 hour @ $20	2.00		2.00
Manufacturing overhead:
.1 hour @ $10	1.00		1.00
Total manufacturing cost per unit	$7.00		$10.00

10. Manufacturing equipment depreciation is $20,000 per quarter.

11. Photo Enhances quarterly selling and administrative expenses are $100,000, paid in cash. The company rents all its administrative office space and equipment. Thus, there is no depreciation related to the administrative functions of the company.

12. The $1,000,000 loan from Fin Bank and Best Company will be received on January 1, 20x5. Photo Enhance will use all the money immediately to purchase new equipment. Interest payments will be made at the end of each quarter. Loan principal will be paid in four equal installments of $250,000 at the end of each quarter.

13. Hurt anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

14. Photo Enhances projected balance sheet as of December 31, 20x4, follows:

Cash	$ 95,000
Accounts receivable	132,000
Inventory:
Raw material	59,200
Finished goods	167,000
Plant and equipment, net	8,000,000
Total assets	$ 8,453,200
Accounts payable	$ 99,400
Common stock	5,000,000
Retained earnings	3,353,800
Total liabilities and stockholders' equity	$ 8,453,200

Required:

1. Prepare Photo Enhance Companys master budget for 20x5 by completing the following schedules:

• Schedule 1 Sales budget with a schedule of expected cash collections

• Schedule 2 Production budget

• Schedule 3 Direct materials budget with a schedule of cash disbursements for materials

• Schedule 4 Direct labor budget

• Schedule 5 Manufacturing overhead budget

• Schedule 6 Ending finished goods inventory budget

• Schedule 7 Selling and administrative expenses budget

• Schedule 8 Cash budget

• Schedule 9 Budgeted Income Statement

• Schedule 10 Budgeted Balance Sheet