Prepare the direct-material budget and Part 5: Prepare the cash disbursements budget.

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 firms master budget for 20x1. Ive decided to go ahead and purchase the industrial robot weve been talking about. Well 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 $1,260,000. Well finance it with a one-year $1,260,000 loan from Shark Bank and Trust Company. Ive 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 firms two product lines are designated as S (small frames; 5 7 inches) and L (large frames; 8 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. LaKendra Jackson, Frame-Its 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 70,000 S frames and 60,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 6,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x1 are expected to be 76,000 units.
2. Frame-Its sales history indicates that 70 percent of all sales are on credit, with the remainder of the sales in cash. The companys 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 $14, and the L frame sells for $18. These prices are expected to hold constant throughout 20x1.
4. Frame-Its production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarters sales. Moreover, an attempt is made to end each quarter with 20 percent of the glass sheets needed for the following quarters production. Because metal strips are purchased locally, Frame-It buys them on a just-in-time basis; inventory is negligible.
5. All of Frame-Its direct-material purchases are made on account, and 80 percent of each quarters 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:

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. Because 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 201 are as follows: 8. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 201. 8. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 201. All of these costs will be paid in cash during the quarter incurred except for the depreciation charges. 9. Frame-It's quarterly selling and administrative expenses are $113,000, paid in cash. 10. Jackson anticipates that dividends of $63,000 will be declared and paid in cash each quarter. 11. Frame-It's projected balance sheet as of December 31,200, follows: Required information Metal strips: \begin{tabular}{|c|c|c|c|c|c|c|} \hline letal strips: & & & & & & \\ \hlineS frames to be produced & & & & & & 0 \\ \hline Metal quantity per unit (feet) & & & & & & \\ \hline Needed for S frame production & 0 & 0 & 0 & 0 & 0 & 0 \\ \hlineL frames to be produced & & & & & & 0 \\ \hline Metal quantity per unit (feet) & & & & & & \\ \hline Needed for L frame production & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Total metal needed for production; to be purchased (feet) & & & & & & 0 \\ \hline Price per foot & & & & & & \\ \hline Cost of metal strips to be purchased & $ & $ & 0 & 0 & 0 & $ \\ \hline Glass sheets: & & & & & & \\ \hlineS frames to be produced & & & & & & 0 \\ \hline Glass quantity per unit (sheets) & & & & & & \\ \hline Needed for S frame production & 0 & 0 & 0 & 0 & 0 & 0 \\ \hlineL frames to be produced & & & & & & 0 \\ \hline x Glass quantity per unit (sheets) & & & & & & \\ \hline Needed for L frame production & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Total glass needed for production (sheets) & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Add: Desired ending inventory & & & & & & 14,180 \\ \hline Total glass needs & 0 & 0 & 0 & 0 & 0 & 14,180 \\ \hline Less: Expected beginning inventory & & & & & & \\ \hline Glass to be purchased & 0 & 0 & 0 & 0 & 0 & 14,180 \\ \hline Price per glass sheet & & & & & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline & & & 201 & & \\ \hline & 1st Quarter & 2nd Quarter & 3rd Quarter & 4th Quarter & Entire Year \\ \hline Raw-material purchases: & & & & & \\ \hline Cash payments for purchases during the current quarter & & & & & $ \\ \hline Cash payments for purchases during the preceding quarter & & & & & 0 \\ \hline Total cash payments for raw-material purchases & $ & $ & $ & $ & $ \\ \hline Direct labor: & & & & & \\ \hline Frames produced ( S and L ) & & & & & 0 \\ \hline Direct-labor hours per frame & & & & & \\ \hline Direct-labor hours to be used & 0 & 0 & 0 & 0 & 0 \\ \hline Rate per direct-labor hour & & & & & \\ \hline Total cash payments for direct labor & $ & $ & $ & $ & $ \\ \hline Production overhead: & & & & & \\ \hline Indirect material & & & & & $ \\ \hline Indirect labor & & & & & 0 \\ \hline Other & & & & & 0 \\ \hline Total cash payments for production overhead & $ & $ & $ & $ & $ \\ \hline Cash payments for selling and administrative expenses & & & & & $ \\ \hline Total cash disbursements & $ & $ & $ & $ & $ \\ \hline \end{tabular}