Master Budget Case

Jeffrey Vaughn, president of Frame$-$It Company, was just concluding a budget meeting with his senior staff. It was November of $20$x$0,$ and the group was discussing preparation of the firm$$s master budget for $20$x$1.$I$$ve decided to go ahead and purchase the industrial robot we$$ve been talking about. We$$ll 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.$ We$$ll finance it with a one$-$year $$1,000,000$ loan from Shark Bank and Trust Company. I$$ve negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be $10$ percent, and interest payments will be quarterly as well.$$ With that the meeting broke up$,$ and the budget process was on$.$

Frame$-$It Company is a manufacturer of metal picture frames. The firm$$s two product lines are designated as S $($small frames, $5\backslash$times $7$ inches$)$ and L $($large frames, $8\backslash$times $10$ inches$).$ The primary raw materials are flexible metal strips and $9-$inch by $24-$inch glass sheets. Each S frame requires a $2-$foot metal strip; an L frame requires a $3-$foot strip. Allowing for normal breakage and scrap glass, Frame$-$It can get either four S frames or two L frames out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, Frame$-$It$$s controller, is in charge of preparing the master budget for $20$x$1.$ She has gathered the following information:

$1.$ Sales in the fourth quarter of $20$x$0$ 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 $20$x$1$ are expected to be $55,000$ units.

$2.$ Frame$-$It$$s sales history indicates that $60$ percent of all sales are on credit, with the remainder of the sales in cash. The company$$s 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 $20$x$1.$

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

$5.$ All of Frame$-$It$$s direct$-$material purchases are made on account, and $80$ percent of each quarter$$s 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 $20$x$1$ are as follows:

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: $$ sheet @ $$8$ per sheet $2$

L: $(1)/(2)$ sheet @ $$8$ per sheet $4$

Direct labor:

$\mathrm{.}1$ hour @ $$20$ per hour $22$

Production overhead:

$\mathrm{.}1$ direct$-$labor hour $\backslash$times $$10$ per hour $11$

Total production cost per unit $$7$ $$10$

$8.$ The predetermined overhead rate is $$10$ per direct$-$labor hour. The following production overhead costs are budgeted for $20$x$1.$

$1$st Quarter $2$nd Quarter $3$rd Quarter $4$th Quarter Entire Year

Indirect material $ $10,200$ $ $11,200$ $ $12,200$ $ $13,200$ $ $46,800$

Indirect labor $40,80044,80048,80052,800187,200$

Other overhead $31,00036,00041,00046,000154,000$

Depreciation $20,00020,00020,00020,00080,000$

Total overhead $$102,000$ $$112,000$ $$122,000$ $$132,000$ $$468,000$

$9.$ All of these costs will be paid in cash during the quarter incurred except for the depreciation charges.

$10.$ Frame$-$It$$s quarterly selling and administrative expenses are $$100,000,$ paid in cash.

$11.$ Jackson anticipates that dividends of $$50,000$ will be declared and paid in cash each quarter.

$$

$12.$ Frame$-$It$$s projected balance sheet as of December $31,20$x$0,$ follows:

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