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:

1. Sales budget, including a schedule of expected cash collections.

2. Production budget.

3. Direct materials budget, including a schedule of expected cash disbursements for materials.

4. Direct labor budget.

5. Manufacturing overhead budget.

6. Ending finished goods inventory budget calculating the expected value of the finished goods inventory as of June 30, 2019.*

7. Selling and administrative expense budget.

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).

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.

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

1. Sales budget

	Q1	Q2	Q3	Q4	Total
Sales quantity	44000	82000	42000	76000	244000
Selling Price per unit	107	107	107	107	107
Sales Budget	4708000	8774000	4494000	8132000	26108000
Cash Collection
75% in the quarter of sales	3531000	6580500	3370500	6099000	19581000
25% in the following quarter	1230000	1177000	2193500	1123500	5724000
Cash Collection	4761000	7757500	5564000	7222500	25305000

2. Production budget

	Q1	Q2	Q3	Q4	Total
Expected units to be sold	44000	82000	42000	76000	244000
Add: Desired ending inventory 26% of sales of next quarter	21320	10920	19760	23000
Total units available for sale	65320	92920	61760	99000	319000
Less: Opening inventory	0	21320	10920	19760
Production needed	65320	71600	50840	79240	267000

3. Direct materials budget

	Q1	Q2	Q3	Q4	Total
Material needed per gnome	4	4	4	4	4
Production needed	65320	71600	50840	79240	267000
Total material needed	261280	286400	203360	316960	1068000
Add: Desired ending inventory 35% of next quarter production	100240	71176	110936	110000
Total material available	361520	357576	314296	426960	1460352
Less: Opening inventory	70000	100240	71176	110936
Total purchases to be made	291520	257336	243120	316024	1108000
Cash disbursement
Price per unit	0.9	0.9	0.9	0.9	0.9
Total purchase price	262368	231602	218808	284422	997200
45% paid in same quarter	118066	104221	98464	127990	448740
55% paid in next quarter	96000*	144302	127381	120344	488028
Total disbursement	214066	248523	225845	248334	936768

*Accounts payable from balance sheet

4. Direct labor budget

	Q1	Q2	Q3	Q4	Total
Labor hours per gnome	3	3	3	3	3
Production needed	65320	71600	50840	79240	267000
Total labor hours needed	195960	214800	152520	237720	801000
Per hour cost	15	15	15	15	15
Total labor cost	2939400	3222000	2287800	3565800	12015000