Question 3 Jason Rivers, the CEO of Ecoframe Ltd was just concluding a budget meeting with his senior managers. It was November and the group was discussing plans for the nest year's budget. I have decided to go ahead and purchase the industrial robot we have been talking about. We will make the acquisition at the start of January next year, and I expect that it will take most of the year to train the workers and organise the production processes to reap the full advantages of the new equipment." There were many questions from the managers, and one focused on how the company would finance the equipment. Rivers outlined his plan. 'The robot will cost $950 000. There will also be an additional $50000 of equipment to purchased to allow the robot to operate. We will finance these purchases with a $1000 000 loan from the Shark Bay Bank. I have negotiated a repayment schedule of four equal instalments, payable on the last day of each quarter. The interest rate is 10 per cent and interest is also paid quarterly, with that the meeting was complete and the budget process commenced EcoFrame is a manufacturer of metal picture frames. The firm's two product lines are called S (small frames, 12 x 18 cm) and L (large frames, 20 x 25 cm). The primary raw materials are flexible metal strips and 23 cm x 60 cm glass sheets. Each S frame requires a two to three metre metal strip and an L frame requires a one metre strip. Allowing for normal breakage and scrap glass, EcoFrame can cut either four S frames or two L frames from a single glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, EcoFrame's accountant, is currently preparing the annual budget for next year. She has gathered the following information: Sales in the fourth quarter of the current year are expected to be 50000 S frames and 40000 L frames. The sales manager predicts that, over the next two years, sales in each product line will grow by 5000 units each quarter over the previous quarter. For example, Sframe sales in the first quarter of the budget year are expected to be 55000 units. EcoFrame's sales history indicates that 60 per cent of all sales are on credit, with the remainder of the sales in cash. The company's experience shows that 80 per cent of the credit sales are collected during the quarter in which the sales are made, while the remaining 20 per cent are collected in the following quarter. There are no bad debts. The S frame sells for $10, and the L frame sells for $15. These prices are not to change throughout the budget year. EcoFrame's production manager tries to end each quarter with enough finished goods inventory in each product line to cover 20 per cent of the following quarter's sales. In addition, an attempt is made to end each quarter with 20 per cent of the glass sheets needed for the following quarter's production. Since metal strips are purchased locally. EcoFrame buys them on a just-in- time basis, so inventory is negligible. All of EcoFrame's direct material purchases are on credit, and 80 per cent of each quarter's purchases are paid in cash during the same quarter as the purchases are made. The other 20 per cent are paid in the next quarter. Indirect materials are purchased as needed for cash. Work in process inventory is negligible. Projected manufacturing costs for each product in the budget year are as follows. I S Frame L Frame $2 $3 2 Direct material Metal strips: S: 2/3 metre @ $3 per metre L: 1 metre @ $3 per metre Glass sheets: S: 1/4 sheet @ $8 per sheet L: 1/2 sheet @ $8 per sheet Direct labour 0.1 hour @ $20 per hour Manufacturing overhead 0.1 direct labour hour $10 per hour Total manufacturing cost per unit 4 2 2 $7 $10 The predetermined overhead rate is $10 per direct labour hour. The following manufacturing overhead costs are budgeted. 1st quarter 2nd quarter 3rd quarter 4th quarter Entire year Indirect material $ 10200 $ 11200 $ 12200 $ 13200 $ 46800 Indirect labour 40 800 44800 48 800 52 800 187200 Other overhead 31000 36000 41 000 46000 154000 Depreciation 20000 20000 20000 20000 80000 Total overhead $102 000 $112000 $122000 $132000 $168000 * All these costs except for the depreciation charges will be paid in cash during the quarter Incurred. EcoFrame's quarterly selling and administrative expenses are $100 000, paid in cash. Jackson anticipates that dividends of $50 000 will be declared and paid in cash each quarter. EcoFrame's projected balance sheet as at 31 December of the current year is as follows. $ Cash 95000 Accounts receivable 132 000 Inventory: Raw materials 59 200 Finished goods 167 000 Plant and equipment (net of accumulated depreciation) 8000000 Total assets $8453 200 Accounts payable $ 99 400 Ordinary shares 5000 000 Retained earnings 3353 800 Total liabilities and shareholders' equity $8453 200 Required: Prepare EcoFrame's annual budget for the next year by completing the following schedules and statements. 1 Sales budget Sales Budget Current year Budget year 4th 1st 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 XL sales price L frame sales revenue Total sales revenue Cash sales Credit salest 40% of total sales 60% of total sales Entire year 2 Cash receipts budget Cash Receipt Budget Budget year 1st quarter 2nd quarter 3rd quarter 4th quarter Cash sales Cash receipts from credit sales made during current quarter Cash receipts from credit sales made during previous quartert Total cash receipts 80% of current quarter's credit sales + 20% of previous quarter's credit sales 3 Production budget Production Budget Current year Budget year 4th 1st 2nd 3rd 4th quarter quarter quarter quarter 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 Budget year 3rd 4th quarter quarter Entire year 4 Direct materials budget Direct Materials Budget Current year 4th 1st 2nd quarter quarter quarter Metal strips S frames to be produced x quantity per unit (metres) Qty needed for S frame production L frames to be produced x quantity per unit (metres) Qty needed for L frame production Total metal needed for production (metres) X price per metre Cost of metal strips to be purchased 4th quarter Entire year 5 Cash payment budget Cash Payments Budget Budget year 1st 2nd 3rd quarter quarter quarter Direct material purchases Cash payments for purchases during the current quarter Cash payments for purchases during the preceding quarter Total cash payments for direct material purchases Direct labour Frames produced (S and L) x direct labour hours per frame Direct labour hours x rate per direct labour hour Total cash payments for direct labour Manufacturing overhead Indirect material Indirect labour Other Total cash payments for manufacturing overhead Cash payments for selling and administrative expenses Total cash payments Question 3 Jason Rivers, the CEO of Ecoframe Ltd was just concluding a budget meeting with his senior managers. It was November and the group was discussing plans for the nest year's budget. I have decided to go ahead and purchase the industrial robot we have been talking about. We will make the acquisition at the start of January next year, and I expect that it will take most of the year to train the workers and organise the production processes to reap the full advantages of the new equipment." There were many questions from the managers, and one focused on how the company would finance the equipment. Rivers outlined his plan. 'The robot will cost $950 000. There will also be an additional $50000 of equipment to purchased to allow the robot to operate. We will finance these purchases with a $1000 000 loan from the Shark Bay Bank. I have negotiated a repayment schedule of four equal instalments, payable on the last day of each quarter. The interest rate is 10 per cent and interest is also paid quarterly, with that the meeting was complete and the budget process commenced EcoFrame is a manufacturer of metal picture frames. The firm's two product lines are called S (small frames, 12 x 18 cm) and L (large frames, 20 x 25 cm). The primary raw materials are flexible metal strips and 23 cm x 60 cm glass sheets. Each S frame requires a two to three metre metal strip and an L frame requires a one metre strip. Allowing for normal breakage and scrap glass, EcoFrame can cut either four S frames or two L frames from a single glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials. Emily Jackson, EcoFrame's accountant, is currently preparing the annual budget for next year. She has gathered the following information: Sales in the fourth quarter of the current year are expected to be 50000 S frames and 40000 L frames. The sales manager predicts that, over the next two years, sales in each product line will grow by 5000 units each quarter over the previous quarter. For example, Sframe sales in the first quarter of the budget year are expected to be 55000 units. EcoFrame's sales history indicates that 60 per cent of all sales are on credit, with the remainder of the sales in cash. The company's experience shows that 80 per cent of the credit sales are collected during the quarter in which the sales are made, while the remaining 20 per cent are collected in the following quarter. There are no bad debts. The S frame sells for $10, and the L frame sells for $15. These prices are not to change throughout the budget year. EcoFrame's production manager tries to end each quarter with enough finished goods inventory in each product line to cover 20 per cent of the following quarter's sales. In addition, an attempt is made to end each quarter with 20 per cent of the glass sheets needed for the following quarter's production. Since metal strips are purchased locally. EcoFrame buys them on a just-in- time basis, so inventory is negligible. All of EcoFrame's direct material purchases are on credit, and 80 per cent of each quarter's purchases are paid in cash during the same quarter as the purchases are made. The other 20 per cent are paid in the next quarter. Indirect materials are purchased as needed for cash. Work in process inventory is negligible. Projected manufacturing costs for each product in the budget year are as follows. I S Frame L Frame $2 $3 2 Direct material Metal strips: S: 2/3 metre @ $3 per metre L: 1 metre @ $3 per metre Glass sheets: S: 1/4 sheet @ $8 per sheet L: 1/2 sheet @ $8 per sheet Direct labour 0.1 hour @ $20 per hour Manufacturing overhead 0.1 direct labour hour $10 per hour Total manufacturing cost per unit 4 2 2 $7 $10 The predetermined overhead rate is $10 per direct labour hour. The following manufacturing overhead costs are budgeted. 1st quarter 2nd quarter 3rd quarter 4th quarter Entire year Indirect material $ 10200 $ 11200 $ 12200 $ 13200 $ 46800 Indirect labour 40 800 44800 48 800 52 800 187200 Other overhead 31000 36000 41 000 46000 154000 Depreciation 20000 20000 20000 20000 80000 Total overhead $102 000 $112000 $122000 $132000 $168000 * All these costs except for the depreciation charges will be paid in cash during the quarter Incurred. EcoFrame's quarterly selling and administrative expenses are $100 000, paid in cash. Jackson anticipates that dividends of $50 000 will be declared and paid in cash each quarter. EcoFrame's projected balance sheet as at 31 December of the current year is as follows. $ Cash 95000 Accounts receivable 132 000 Inventory: Raw materials 59 200 Finished goods 167 000 Plant and equipment (net of accumulated depreciation) 8000000 Total assets $8453 200 Accounts payable $ 99 400 Ordinary shares 5000 000 Retained earnings 3353 800 Total liabilities and shareholders' equity $8453 200 Required: Prepare EcoFrame's annual budget for the next year by completing the following schedules and statements. 1 Sales budget Sales Budget Current year Budget year 4th 1st 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 XL sales price L frame sales revenue Total sales revenue Cash sales Credit salest 40% of total sales 60% of total sales Entire year 2 Cash receipts budget Cash Receipt Budget Budget year 1st quarter 2nd quarter 3rd quarter 4th quarter Cash sales Cash receipts from credit sales made during current quarter Cash receipts from credit sales made during previous quartert Total cash receipts 80% of current quarter's credit sales + 20% of previous quarter's credit sales 3 Production budget Production Budget Current year Budget year 4th 1st 2nd 3rd 4th quarter quarter quarter quarter 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 Budget year 3rd 4th quarter quarter Entire year 4 Direct materials budget Direct Materials Budget Current year 4th 1st 2nd quarter quarter quarter Metal strips S frames to be produced x quantity per unit (metres) Qty needed for S frame production L frames to be produced x quantity per unit (metres) Qty needed for L frame production Total metal needed for production (metres) X price per metre Cost of metal strips to be purchased 4th quarter Entire year 5 Cash payment budget Cash Payments Budget Budget year 1st 2nd 3rd quarter quarter quarter Direct material purchases Cash payments for purchases during the current quarter Cash payments for purchases during the preceding quarter Total cash payments for direct material purchases Direct labour Frames produced (S and L) x direct labour hours per frame Direct labour hours x rate per direct labour hour Total cash payments for direct labour Manufacturing overhead Indirect material Indirect labour Other Total cash payments for manufacturing overhead Cash payments for selling and administrative expenses Total cash payments