Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firms master budget for 20x1. Ive 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, Vaughn replied as follows: The robot will cost $1,000,000. Well finance it with a one-year $1,000,000 loan from Shark Bank and Trust Com- pany. 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. Frame-It Company is a manufacturer of metal picture frames. The firms two product lines are des- ignated as S (small frames, 57 inches) and L (large frames, 810 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Each S frame requires a 2-foot metal strip; an L frame requires a 3-foot strip. Allowing for normal breakage and scrap glass, Frame-It 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. Emily Jackson, Frame-Its controller, is in charge of preparing the master budget for 20x1. She has gathered the following information:

1. Sales in the fourth quarter of 20x0 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 20x1 are expected to be 55,000 units.

2. Frame-Its 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 20x1.

4. Frame-Its production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarters sales. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarters production. Since metal strips are purchased locally, Frame-It buys them on a just-in- time basis; inventory is negligible.

5. All of Frame-Its direct-material 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.

6. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible.

7. Projected production costs in 20x1 are as follows:

8. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 20x1. All of these costs will be paid in cash during the quarter incurred except for the depreciation charges.

9. Frame-Its quarterly selling and administrative expenses are $100,000, paid in cash.

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

11. Frame-Its projected balance sheet as of December 31, 20x0, follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Indirect material ................................... $ 10,200 $ 11,200 $ 12,200 $ 13,200 $ 46,800 Indirect labor ......................................... 40,800 44,800 48,800 52,800 187,200 Other overhead ..................................... 31,000 36,000 41,000 46,000 154,000 Depreciation .......................................... 20,000 20,000 20,000 20,000 80,000 Total overhead ....................................... $102,000 $112,000 $122,000 $132,000 $468,000 S Frame L Frame Direct material: Metal strips: S: 2 ft. @ $1 per foot ............................................................................................................... $2 L: 3 ft. @ $1 per foot ................................................................................................................ $ 3 Glass sheets: S: 14 sheet @ $8 per sheet ...................................................................................................... 2 L: 12 sheet @ $8 per sheet ...................................................................................................... 4 Direct labor: .1 hour @ $20 per hour ........................................................................................................... 2 2 Production overhead: .1 direct-labor hour $10 per hour ....................................................................................... 1 1 Total production cost per unit ...................................................................................................... $7 $10 Cash ............................................................................................................................................................... $ 95,000 Accounts receivable ...................................................................................................................................... 132,000 Inventory: Raw material ............................................................................................................................................. 59,200 Finished goods ......................................................................................................................................... 167,000 Plant and equipment (net of accumulated depreciation) ............................................................................ 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: Prepare Frame-It Companys master budget for 20x1 by completing the following sched- ules and statements. 1. Sales budget: 2. Cash receipts budget: 3. Production budget: 20x1 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Cash sales ............................................................. Cash collections from credit sales made during current quarter* .......................... Cash collections from credit sales made during previous quarter ........................ Total cash receipts ................................................ *80% of current quarters credit sales. 20% of previous quarters credit sales. 20x0 20x1 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year S frame unit sales ....................... S sales price ........................... S frame sales revenue ............... L frame unit sales ....................... L sales price ............................ L frame sales revenue ................ Total sales revenue .................... Cash sales* ................................. Sales on account *40% of total sales. 60% of total sales. 20x0 20x1 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year S frames: Sales (in units) ...................................................... Add: Desired ending inventory ........................... Total units needed ............................................... Less: Expected beginning inventory ................... Units to be produced ........................................... L frames: Sales (in units) ...................................................... Add: Desired ending inventory ........................... Total units needed ............................................... Less: Expected beginning inventory ................... Units to be produced ........................................... 4. Direct-material budget: 5. Cash disbursements budget: 20x1 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Raw-material purchases: Cash payments for purchases during the current quarter ................. Cash payments for purchases during the preceding quarter ............ Total cash payments for raw-material purchases ............................... Direct labor: Frames produced (S and L) ................................................................. Direct-labor hours per frame ........................................................... Direct-labor hours to be used ............................................................. Rate per direct-labor hour ............................................................... Total cash payments for direct labor ................................................... Production overhead: Indirect material ................................................................................... Indirect labor ........................................................................................ Other .................................................................................................... Total cash payments for production overhead ................................... Cash payments for selling and administrative expenses ................... Total cash disbursements .................................................................... 20x0 20x1 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Metal strips: S frames to be produced .............................. Metal quantity per S unit (ft.) .................... Needed for S frame production ................... L frames to be produced .............................. Metal quantity per L unit (ft.) .................... Needed for L frame production ................... Total metal needed for production; to be purchased (ft.) ................................. Price per foot ............................................ Cost of metal strips to be purchased ........... Glass sheets: S frames to be produced .............................. Glass quantity per S unit (sheets) ............. Needed for S frame production ................... L frames to be produced .............................. Glass quantity per L unit (sheets) ............. Needed for L frame production ................... Total glass needed for production (sheets) ..................................................... Add: Desired ending inventory ......................... 10,400 10,400 Total glass needs ............................................... Less: Expected beginning inventory ................. Glass to be purchased ...................................... Price per glass sheet ..................................... Cost of glass to be purchased .......................... Total raw-material purchases (metal and glass) ...................................... 6. Summary cash budget: 7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. (Hint: In the budget, actual and applied overhead will be equal.) 8. Prepare Frame-Its budgeted income statement for 20x1. (Ignore income taxes.) 9. Prepare Frame-Its budgeted statement of retained earnings for 20x1. 10. Prepare Frame-Its budgeted balance sheet as of December 31, 20x1. Design Elements: (mouse): Image Source, all rights reserved; (globe): Doug Armand/Getty Image; (scale): DNY59/Getty Images; (tablet): McGraw-Hill Education; (pen): Shutterstock/wrangler 20x1 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year Cash receipts (from schedule 2) ......................... Less: Cash disbursements (from schedule 5) ............................................ Change in cash balance due to operations ................................................... Payment of dividends .......................................... Proceeds from bank loan (1/2/x1) ...................... Purchase of equipment ....................................... Quarterly installment on loan principal .................................................. Quarterly interest payment ................................. Change in cash balance during the period ....................................................... Cash balance, beginning of period .................... Cash balance, end of period ...............................