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 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, 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-It's 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-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 20x1.
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 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: 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

1. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 20x1.

		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

1. All of these costs will be paid in cash during the quarter incurred except for the depreciation charges.
2. Frame-It's quarterly selling and administrative expenses are $100,000, paid in cash.
3. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

1. Frame-It's projected balance sheet as of December 31, 20x0, 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' equity	$8,453,200

Required:

Prepare Frame-It Company's master budget for 20x1 by completing the following schedules and statements.

1. Sales budget:

	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.

1. Cash receipts 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 quarter's credit sales. 20% of previous quarter's credit sales.

1. Production budget:

	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

1. Direct-material budget:

	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)

	20x0			20x1
	4th Quarter		1st Quarter		2nd Quarter		3rd Quarter	4th Quarter		Entire Year
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)

1. 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

1. Summary cash budget:

	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

1. Prepare a budgeted schedule ofcost of goods manufactured and sold for the year 20x1. (Hint:In the budget, actual and applied overhead will be equal.)
2. Prepare Frame-It's budgeted income statement for 20x1. (Ignore income taxes.)
3. Prepare Frame-It's budgeted statement of retained earnings for 20x1.
4. Prepare Frame-It's budgeted balance sheet as of December 31, 20x1.