Master Budget Case 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 firm's master budget for 20x1. \"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 nancing the acquisition, Vaughn replied as follows: \"The robot will cost $1,000,000. We'll nance it with a oneyear $1,000,000 loan from Shark Bank and Trust Company. I've negotiated a repayment schedule of four equal installments 0n 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. FrameIt Company is a manufacturer of metal picture frames. The firm's two product lines are designated as S (small frames, 5x7 inches) and L (large frames, 8x 10 inches). The primary raw materials are exible metal strips and 9inch by 24inch 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 insignicant in cost and are treated as indirect materials. Emily Jackson, FrameIt's controller, i_i_r_1_ch_ar_'ge 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 rst quarter of 20x1 are expected to be 55,000 units. 2. Frame 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_ab_le__tg 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- production manager attempts to end each quarter with enough nished- 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, FrameIt buys them on a justintime 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. Workinprocess inventory is negligible. 7. Projected production costs in 20x1 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: V2 sheet @ $8 per sheet 4 Direct labor: .1 hour @ $20 per hour 2 2 Production overhead: .1 directlabor hour X $10 per hour 1 1 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 20x1. lst 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Year Indirect material 5 \"1,2111; H.201; [2,2912 [$21212 M 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 9. All_9_f_ these costs will be paid in cash during the quarter incurred except for the depreciation charges. 10. Frame-It's quarterly wand 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. FrameIt's projected balance sheet as of December 31, 20x0, follows: Cash 3 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 FrameIt Company's master budget for 20x1 by completing the following schedules and statements. 1-SaIes budget: 20x0 20x1 4th lst 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Quarter Year S frame unit sales X S sales price S frame sales revenue L frame unit sales X L sales price L frame sales revenue Total sales revenue Cash sales' Sales on accoun \"10% qf'torar' sates. 1'60% oftotat' safes. 2. Cash receipts budget: 20x1 1st 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter 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 quarter's credit sales. +20% of previous quarter's credit sales. 3. Production budget: 20x0 20x1 4th 1st 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Quarter 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 produced4. Direct-materialbudget: 20x0 20x1 4th 1st 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Quarter Year Metal strips: S frames to be produced X Metal quantity per S unit (ft) Needed for S frame production L frames to be produced X Metal quantity per L unit (ft) Needed for L frame production Total metal needed for production; to be purchased (it) X Price per foot Cost of metal strips to be purchased Glass sheets: S frames to be produced X Glass quantity per S unit (sheets) Needed for S frame production L frames to be produced X Glass quantity per L unit (sheets) Needed for L frame production Total glass needed for production (sheets) Less: Expected beginning inventory Glass to be purchased x Price per glass sheet Cost of glass to be purchased Total rawmaterial purchases (metal and glass) 20x0 201:] 4th 1st 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Quarter Year 5. Cash disbursements budget: 20x1 1st 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter Year Raw-material purchases: Cash payments for purchases during the current quarter Cash payments for purchases during the preceding quarter Total cash payments for rawmaterial purchases Direct labor: Frames produced (S and L) X Direct-labor hours per frame Directlabor hours to be used X 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 5. Summary cash budget: 20x1 lst 2nd 3rd 4th Entire Quarter Quarter Quarter Quarter 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 (NZ/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 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 FrameIt's budgeted income statement for 20x1. [Ignore income taxes.) 9. Prepare FrameIt's budgeted statement of retained earnings for 20x1. 10. Prepare FrameIt's budgeted balance sheet as of December 31, 20x1