Our controller, Richard Kimmel is negotiating with potential new Clay suppliers in Kentucky. We need the Large Gnome Divisions Master Budget for the fiscal year ended June 30, 2019 for our corporate strategic planning process, and we cannot wait for Richards return from Kentucky. We would like you to prepare the Large Gnome Divisions Master Budget for the fiscal year ended June 30, 2019.

The deliverables are as follows:

8. Cash budget.

9. Budgeted income statement for the year ending June 30, 2019.*

10. Budgeted balance sheet for June 30, 2019.*

All the Master Budget schedules except those marked with an asterisk for the Large Gnome Division should include a column for each quarter and a total column for the fiscal year. We only need annual totals for the budgeted financial statements (schedules 9 and 10) and we only need a year-end total for the value of finished goods inventory (schedule 6).

The hard copies of these budget schedules should be delivered by the company deadline. You can print more than one schedule per page, but do not have a page break in the middle of a budget schedule. I like to be able to view an entire budget schedule without flipping back and forth between pages. Please also use a type font of between 10-12 points for printing. We also need you to submit (via e-mail) the Excel spreadsheet that you used to create the budget schedules you print so we can use the spreadsheet as a starting point for future budgets. Upload the Excel spreadsheet on Blackboard. We need that spreadsheet file the night before the meeting

Ive attached a brief description of the Large Gnome Division to the budget data Richard gave me before he left for Kentucky. We eagerly await your results.

Sincerely, Candice Kimmel

The garden gnomes were first produced in volume made in the German town of Graefenroda by Phillip Griebel back in the mid-1800s. Garden gnomes quickly became popular, and their use as a garden ornament spread from Germany into France and England. With the spreading popularity of garden gnomes, numerous gnome manufacturers sprang up throughout Germany, with each manufacturer developing their own particular style and design.i

Traditional gnomes were made from terracotta clay slurry poured into molds. The gnome is removed from the mold, allowed to dry, and then fired in a kiln until it is hard. Once cooled, the gnome is painted to the level of detail desired.ii German manufacturers disappeared during WWII. Post World War II, gnome production moved to lower cost countries and lower cost processes and materials were used. Most modern gnomes are made from plastic resins using injection molds rather than terracotta.iii Griebel's descendants are the last remaining German producers, and they are last producers making the traditional terracotta garden gnomes.

Kimmel Gnomes, located in South Dakota, may be the only other manufacturer of high quality clay garden gnomes that are hand finished.v Kimmel Gnomes are stoneware, rather than terracotta. Stoneware uses higher-quality clay than terracotta and the gnomes are fired at higher temperature, yielding a stronger, more durable gnome. The gnomes are fired inside and out and are colored with glaze before firing, rather than being painted after firing. As a result Kimmel gnomes retain their color when exposed to the elements and they are not affected by moisture or freezing. The Large Gnome Division manufactures and sells gnomes between 12 and 15 inches in length or height (the Hedgerow Gnome model is shown in the picture to the left). Many different styles are made, but each large gnome requires virtually the same amount of time and materials.

During 2018-19 fiscal year, the average selling price for large gnomes is expected to be $107 per gnome. The Large Gnome Division forecasts the following number gnome sales.

Quarter	First	Second	Third	Fourth
Gnome Sales	44,000	82,000	42,000	76,000

The collection pattern for Accounts Receivable is as follows:

o 75 percent of all sales are collected within the quarter in which they are sold

o 25 percent of all sales are collected in the following quarter.

o There are no bad debts/uncollectables.

Due to higher than expected demand this year, the Large Gnome Division expects to have no finished gnomes in inventory on July 1, 2018, the beginning of the first quarter of the new fiscal year. To avoid having that problem in the coming fiscal year, the Large Gnome Division would like to have the ending inventory of Gnomes at the end of each of the first three quarters equal to 26% of the budgeted sales for the next quarter. They would like to have 23,000 finished gnomes on hand on June 30, 2019.

Quarter	First	Secon	Third	Fourth
Ending FG inventory in Gnomes as a % of the next quarters budgeted sales	26%	26%	26%	?
Ending FG inventory in Gnomes	?	?	?	23,000

Each large gnome requires an average of 4 pounds of clay. The Large Gnome Division buys clay for $0.90 per pound and they expect the price to remain constant throughout the year. They expect to have 70,000 pounds of clay on hand as of July 1, 2018, the beginning of the first quarter of the fiscal year. At the end of each of the first three quarters, the Large Gnome Division would like to have their direct materials inventory quantity to equal 35 percent of the amount required for the following quarters planned production. On June 30, 2019, the end of the fiscal year, Large Gnome Division would like to have 110,000 pounds of clay on hand

Quarter	First	Second	Third	Fourth
Ending DM inventory as a % of the next quarters production requirement	35%	35%	35%	?
Ending DM inventory in pounds	?	?	?	110,000

The Large Gnome Division buys its clay on account. It pays for 45% of its purchases of direct materials in the quarter in which they were purchased and 55% in the quarter after they were purchased.

Each large gnome requires 3.00 hours (180 minutes) of direct labor. Employees engaged in direct labor will be paid an estimated $15.00 per labor hour. Wages and salaries are paid on the 15th and 30th of each month.

Variable manufacturing overhead is estimated to be $11.00 per direct labor hour for the coming fiscal year. All variable manufacturing overhead expenses are paid for in the quarter incurred.

Fixed manufacturing overhead is estimated to total $330,000 each quarter, with $190,000 out of the total amount of $330,000 representing depreciation on machinery, equipment and the factory. All other fixed manufacturing overhead expenses are paid in cash in the quarter they occur. The fixed manufacturing overhead rate will be computed by dividing the years total fixed manufacturing overhead by the years budgeted direct labor hours. Round the fixed overhead rate to the nearest penny.

Variable selling and administrative expenses are estimated to be $14.00 per gnome sold. Fixed selling and administrative expenses are expected to total $90,000 each quarter, with $25,000 out of the total amount of $90,000 representing depreciation on the office space, furniture and equipment. Other than depreciation, all selling and administrative expenses are paid for in the quarter they occur.

On June 30, 2019 the Large Gnome Division plans to buy new machinery and equipment for $1,900,000. The new machinery and equipment will be acquired at the very end of the year, so it will not be used in production and sales during the coming year and it will not be depreciated until the following year. The Large Gnome Division expects to pay 15% down and finance the remaining 85% of the equipment cost with a loan. No interest payable will accrue on the equipment loan until after June 30, 2019.

The Division must maintain a minimum cash balance of $60,000. If after accounting for cash receipts and disbursements (including dividends) in the cash budget, the budgeted cash available cash falls below $60,000 in any quarter, the Division will need to borrow cash. They have arranged a line of credit with Liberty Bank, allowing it to borrow in $10,000 increments. Assume borrowing will take place at the beginning of any quarter in which the available cash would otherwise be below $60,000 so that at no time during the quarter will the cash balance fall below $60,000 (after payment of interest). If there is extra cash at the end of the quarter and there is borrowing outstanding, the division should pay down principal (also in increments of $10,000). Liberty Bank charges the Division interest at the rate of 1.0% per quarter, which must be paid at the end of each quarter.

As a fully owned subsidiary, the Large Gnome Division does not pay income taxes. All income taxes are charged to Kimmel Gnomes, the parent company. Large Gnome Division will pay dividends of $25,000each quarter to its corporate parent, Kimmel Gnomes. The dividends must be paid, even if the Large Gnome Division has to borrow on its line of credit to make the payment.

The budgeted balance sheet for the Large Gnome Division on June 30, 2018 (which is the same as the budgeted balance sheet at the beginning of business July 1, 2018) is presented below. Kimmel Gnomes owns 100% of the Capital Stock of the Large Gnome Division.

LARGE GNOME DIVISION KIMMEL GNOMES BUDGETED BALANCE SHEET JUNE 30, 2018

Assets	LIABILITIES & EQUITY
Cash $208,000	Accounts Payable $96,000
Accounts Receivable 1,230,000	Notes Payable 0
Raw Material Inventory 63,000	Capital Stock 4,000,000
Plant and Equipment 14,500,000	Retained Earnings 11,905,000
TOTAL ASSETS $16,001,000	TTL LIAB. & SE $16,001,000

2 3 4 5 6 First 44,000 1. Sales budget Budgeted sales unit X Unit selling price Total Sales Revenue Second 82,000 107 8,774,000 Third 42,000 107 4,494,000 107 Fourth 76,000 107 8,132,000 Total 244,000 107 26,108,000 4,708,000 8 1.A Schedule of Expected Cash Collections Second Third Fourth First 1,230,000 3,531,000 1,177,000 6,580,500 2,193,500 3,370,500 Total 1,230,000 4,708,000 8,774,000 4,494,000 6,099,000 25,305,000 1,123,500 6,099,000 7,222,500 4,761,000 7,757,500 5,564,000 First 44,000 21,320 65,320 10 Beginning Accounts Receivable 11 First quarter sales 12 Second-quarters sales 13 Third-quarter sales 14 Fourth-quarter sales 15 Total cash collections 16 17 2. Production Budget 18 Budgeted unit Sales (Schedule 1) 19 Add desired unit of ending finished goods inventory 20 Total needs 21 Less units of beginning finished goods Inventory 22 Required production in units 23 24 3. Materials Budget 25 26 Required production in cases 27 Units of raw materials needed per case 28 Units of raw materials needed to meet production 29 Add desired units of ending raw materials inventory 30 Total units of raw materials need 31 Less units of beginning raw materials inventory 32 Units of raw materials to be purchased 33 Cost of raw materials per pound 34 Cost of raw materials to be purchased Second 82,000 10,920 92,920 21,320 71,600 Third 42,000 19,760 61,760 10,920 50,840 Fourth 76,000 23,000 99,000 19,760 79,240 Total 244,000 23,000 267,000 65,320 267,000 First 65,320 Second 71,600 Fourth 7 9,240 179 240 Total 267,000 261,280 100,240 361,520 70,000 291,520 0.90 $ 262,368 $ 286,400 71,176 357,576 100,240 257,336 0.90 231,602 Third 50,840 4 203,360 110,936 314,296 7 1,176 243,120 $ 0.90 $ $ 218,808 $ 316,960 110,000 426,960 110,936 316,024 0.90 $ 284,422 $ 1,068,000 110,000 1,178,000 70,000 1,108,000 0.90 997,200 $ 25 36 Schedule of Expected cash Disbursements for Purchases of Materials 96,000 118,066 144,302 104,221 38 Beginning accounts payable 19 First-quarter purchases 10 Second-quarter purchases Third-quarter purchases 12 Fourth-quarter purchases 13 Total cash disbursements for materials 127,381 98,464 96,000 262,368 231,602 218,808 127,990 936,768 120,344 127,990 248,334 214,066 248,523 225,845 15 4. Direct Labor Budget First Second 71,600 Third 50,840 Fourth 79,240 Total 267,000 65,320 7 Required Production in cases 8 Direct labor-hours per case 19 Total direct labor-hours needed 50 Direct labor cost per hour 51 Total direct labor cost 195,960 237,720 801,000 214,800 15 3,222,000 152,520 15 2,287,800 15 2,939,400 3,565,800 12,015,000 53 5. Manufacturing overhead budget 55 Budgeted direct labor-hours 46 Variable manufacturing overhead rate -7 Variable manufacturing overhead -8 Fixed manufacturing overhead -9 Total manufacturing overhead 0 Less depreciation 1 Cash disbursements for manufacturing overhead First Second Third Fourth Total 195,960 214,800 152,520 237,720 801,000 11.00 11.00 11.00 11.00 11.00 2,155,560 2,362,800 1,677,720 2,614,920 8,811,000 330,000 330,000 330,000 330,000 1,320,000 2,485,560 2,692,800 2,007,720 2,944,920 10,131,000 190,000 190,000 190,000 190,000 760,000 $ 2,295,560 $ 2,502,800 $1,817,720 $2,754,920 $ 9,371,000 3 Total manufacturing overhead (a) 4 Budgeted direct labor-hours (b) 5 Predetermined overhead rate for the year (a) (b) $ 10,131,000 801,000 $ 12.65 Quantity Cost Total 6. Ending Finished Goods Inventory Budget Item Production cost per case: Direct materials Direct labor Manufacturing overhead Unit product cost $ 4 pounds hours 3 hours $ $ $ 0.90 per pound 15.00 per hour 12.65 per hour 3.60 45 37.95 86.55 $ Budgeted finished goods inventory: Ending finished goods inventory in cases Unit product cost Ending finished goods inventory in dollars 23,000 86.55 1,990,650 $ 7. Selling and Administrative Expense Budget Budgeted units sales Variable selling and administrative expense per case Variable selling and administrative expense Fixed selling and administrative expenses Total selling and adminstrative expenses Less depreciation Cash disbursements for selling and admininstrative expenses First Second 44,000 82,000 14.00 $ 14.00 $ 616,000 1,148,000 90,000 90,000 706,000 1,238,000 25,000 $ 25,000 $ 681,000 1,213,000 Third Fourth 42,000 76,000 14.00 $ 14.00 $ 588,000 1,064,000 90,000 90,000 678,000 1,154,000 25,000 $ 25,000 $ 653,000 1,129,000 Total 244,000 14.00 3,416,000 360,000 3,776,000 100,000 3,676,000