The Acme Company is a manufacturer of coffee tables. Acme has two product lines: the Family Room (FR) table (a larger table) and the Living Room (LR) table (a smaller table built with more expensive wood). The primary raw materials are wood, glass table top sheets, and decorative knobs. Each FR table requires ten feet of wood and the LR table requires eight feet of a more expensive wood. Acme makes both FR and LR table tops out of the same glass sheets but there is more waste when making LR table tops. Each FR table requires five decorative knobs and the LR table requires only three decorative knobs. Other raw materials, such as screws and glue, are insignificant in cost and are treated as indirect material.

Acme’s controller is preparing the annual master budget for 2021 and has gathered the following information:

1. Sales in the fourth quarter of 2020 are expected to be 45,000 FR tables and 41,000 LR tables. The sales manager predicts that over the next two years the sales in each product line will increase by 6,000 units each quarter over the previous quarter (first quarter 2021 sales will increase from the fourth quarter 2020 sales referred to herein). This forecast is based on a review of the historical sales data over the past five years.

2. Acme’s sales history shows that 85% of all sales are on credit, with the remainder in cash. The company’s collection experience shows that 75% of credit sales are collected during the quarter in which the sale is made, while 25% is collected in the following quarter. (100% of Acme’s receivables are collectable.)

3. Currently, the FR table sells for $325 and the LR table sells for $490. These prices are expected remain constant at these levels throughout 2021.

4. Acme’s production manager attempts to end each quarter with enough finished goods inventory to cover 28% of the next quarter’s sales. Direct materials are delivered on a ‘just in time’ basis (no inventory).

5. All Acme direct material purchase are made on account and 85% of each quarters purchases are paid in cash during the same quarter as the purchase. The other 15% is paid in the following quarter. Payments made in the first quarter of 2021 for direct materials purchased in the fourth quarter of 2020 will amount to $1,793,344.

6. Indirect materials are purchased as needed and paid for in cash. Work in process inventory is negligible (none).

7. The predetermined overhead rate is $8 per direct labor hour. The following manufacturing Overhead costs are budgeted for 2021:

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Entire Year
Indirect Material	$327,532	$353,750	$382,100	$412,500	$1,475,882
Indirect labor	848,300	916,200	989,400	1,060,000	3,813,900
Depreciation	510,000	510,000	510,000	510,000	2,040,000
Other overhead	565,432	740,114	907,364	1,075,164	3,288,074
Total Overhead	$2,251,264	$2,520,064	$2,788,864	$3,057,664	$10,617 ,856

All of these costs will be paid in cash, except for depreciation.

8. Acme’s quarterly selling and administrative expenses will be $8,625,000 and $8,150,000 respectively, paid in cash.

9. The company anticipates that dividends of $600,000 will be declared and paid in cash each quarter.

10. The 2021 projected manufacturing costs are as follows: (the costs take into account the new machinery)

Direct material:

Wood:

FR table 10 feet @ $12 per foot

LR table 8 feet @ $16 per foot

Glass Sheets:

FR table 1 sheet @$9 per sheet

LR table 1 sheet @$9 per sheet

Decorative Knobs:

FR table 5 knobs @ $0.24 per knob

LR table 3 knobs @ $0.24 per knob

Direct Labor: .

FR table 2.2 hours at $21 per direct labor hour

LR table 3.4 hours at $24 per direct labor hour

Manufacturing overhead: $8 per direct labor hour.

11. The company is planning to purchase new machinery to make the production process more efficient. The machinery will cost $15,000,000 and they plan to finance the purchase with a five year loan from Rockland bank. On January 2, 2021, they will receive the proceeds of the loan and purchase and begin operating the machinery. The loan will be repaid in 20 equal principle installments on the last day of each quarter. The interest rate will be 6% per year and the interest payments will be made on the last day of each quarter as well.

12. Acme’s balance sheet as of December 31, 2020 will be as follows:

Cash	$446,200	Accounts Payable	$1,793,344
Accounts receivable	7,376,938	Total Liabilities	1,793,344
Inventory:		Common Stock	50,050,000
Raw Materials	0	Retained Earnings	41,994,317
Finished Goods	6,014,523	Total Stockholders Equity	92,044,317
Plant & Equipment (net of Accumulated Depreciation	80,000,000	Total Liabilities and Stockholders Equity	$93,837,661
Total Assets	$93,837,661

Required:

In your role as Acme’s budget director, after receiving input from the various department heads, prepare the Acme company annual Master Budget for 2021 by completing the following quarterly schedules (with annual totals shown for 2021).

Important: You will need to do a 2020 fourth quarter schedule for several of the items below in order to budget out the 2021 amounts:

1. Solved
2. Solved
3. Prepare the Quarterly Production budget for 2021 (units only).
4. Prepare the Quarterly Direct material budget for 2021.
5. Prepare the Quarterly Cash disbursements budget for 2021.
6. Prepare a Quarterly summary cash receipts and disbursements budget for 2021 (cash budget).
7. Prepare a budgeted Schedule of cost of goods manufactured and a budgeted Schedule of cost of goods sold for 2021 (Hint: actual and applied overhead will be equal).
8. Prepare a budgeted Income Statement for 2021.
9. Prepare a budgeted Statement of Retained Earnings for 2021.
10. Prepare a budgeted Balance Sheet as of December 31, 2021.

11. As part of the financial agreement with Rockland Bank the company is required to have a minimum cash balance of $1,000,000 at the end of each quarter. Will they be able to meet this requirement during 2021? What if the loan agreement states that at the end of each quarter they need to have a cash balance of 5% of the balance of the outstanding loan at the start of the following quarter? Will they be able to meet this requirement? Show your calculations. Which requirement do you think is a more reasonable way to protect the risk to the bank? Briefly explain your reason?

12. In past years you have observed that the various department managers seemed to be padding the estimates they submit to you. This budgetary slack leads to the budget being somewhat distorted and diminishes the annual budget’s usefulness. What are some specific steps that management at Acme can take to diminish this problem of budget padding?

13. Some of the department managers are dissatisfied with the current annual budget. They feel that strong market competition requires them to be flexible and innovative in their business decisions but the current annual budget method does not allow for such flexibility. The annual quarterly budgets don’t reflect current business decisions and therefore become stale and the budget projections are no longer meaningful targets. You need to address management’s concerns. Give specific ways of changing the budget process so that the budgets reflect current business decisions and remain useful throughout the year.