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Comprehensive Master Budget Accounting 2302 Professor Norma Jacobs
Due Date __________________
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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 firm’s master budget for 20x1. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll 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, Vaughan replied as follows: “The robot will cost $1,000,000. We’ll finance it with a one-year $1,000,000 loan from Shark Bank and Trust Company. I’ve 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 firm’s two product lines are designated as S (small frames: 5x7 inches) and L(large frames; 8x10 inches). The primary raw materials are flexible metal strips and 9-inch by 24 inch glass sheets. Each S frame requires 2-foot metal strip; an L frame requires a 3-foot strip. Consider the following data in preparing the master budget. Sales in the fourth quarter of 20x0 are expected to be 50,000 S frames and 40,000 L frames. The sales manager predicts that over the next two years, sales in each product line will grow by 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 20x1 are expected to be 55,000 units. 1. Frame-It’s sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company’s 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.) 2. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x1. 3. 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. Since metal strips are purchased locally, Frame-It buys them on a just-in-time basis; inventory is negligible. 4. 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. 5. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible. 6. Project manufacturing costs in 20x1 are as follows: S Frame L Frame Direct material: Metal strips: S: 2 ft. @ $1 per foot………………………………………… $2 L: 3 ft. @ $1 per foot………………………………………… $3 Glass sheets: S: ¼ sheet @ $8 per sheet……………………………………. $2 L: ½ sheet @ $8 per sheet.…………………………………… $4 Direct labor: 0.1 hour @ $20..………………………………………………… $2 $2 Manufacturing overhead: 0.1direct-labor hour @ $10……………………………………… $1 $1 Total manufacturing cost per unit………………………………………. $7 $10 7.
The predetermined overhead rate is $10 per direct-labor hour. The following manufacturing overhead costs are budgeted for 20x1. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Indirect material. .$ 10,200 $ 11,200 $ 12,200 $ 13,200 $ 46,800 Indirect labor....... 40,800 44,800 48,800 52,800 187,200 Other overhead.... 31,000 36,000 41,000 46,000 154,000 Depreciation........ 20,000 20,000 20,000 20,000 80,000 Total overhead. .. .$102,000 $112,000 $122,000 $132,000 $468,000 All of these costs will be paid in cash during the quarter incurred except for the depreciation charges.
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Frame-It’s quarterly selling and administrative expenses are $100,000, paid in cash. 8. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter. 9. Frame-It’s projected balance sheet as of December 31, 20x0, follows: Cash............................................................................................................................. $ 95,000 Accounts receivable.................................................................................................... 132,000 Inventory: Raw material............................................................................................................ 59,200 Finished goods......................................................................................................... 167,000 Plant and equipment (net of accumulated depreciation)............................................. 8,000,000 Total assets.................................................................................................................. $8,453,200 Accounts payable........................................................................................................ Common stock............................................................................................................ Retained earnings.................................................................................................. ...... Total liabilities and stockholders’ equity....................................................................
$ 99,400 5,000,000 3,353,800 $8,453,200
Required:
Prepare Frame-It Company’s master budget for 20x1 by completing the following schedules and statements.
1. Sales budget : 20x0 4th Quarter
20x1 1st 2nd Quarter
3rd Quarter
4th Quarter
2nd Quarter
3rd Quarter
Entire Quarter
Year
4th Quarter
Entire Year
Entire Quarter
Year
S frame Unit Sales.................................. x S sales price......................................... S frame sales revenue............................. L frame unit sales.................................... x L sales price......................................... L frame sales revenue............................. Total sales revenue................................. Cash sales*.............................................. Sales on account ................................. *40% of total sales. 60% of total sales.
2.
Cash receipts budget: 20x1 1st Quarter
Cash sales Cash collections from credit sales made during current quarter* Cash collections from credit sales made during previous quarter Total cash receipts *80% of current quarter’s credit sales. 20% of previous quarter’s credit sales.
3.
Production budget: 20x0 4th Quarter
20x1 1st 2nd Quarter
S frames: Sales (in units)............................................ Add: desired ending inventory................... Total units needed...................................... Less: Expected beginning inventory........... Units to be produced..................................
3
3rd Quarter
4th Quarter
L frames: Sales (in units)............................................ Add: desired ending inventory................... Total units needed...................................... Less: Expected beginning inventory........... Units to be produced..................................
4.
Direct-material budget:
20x0
20x1 4th Quarter
1st 2nd Quarter
3rd Quarter
4th Quarter
Metal strips: S frames to be produced............................. x metal quantity per unit (ft.)....................... Needed for S Frame production.................. L frames to be produced............................. x metal quantity per unit (ft.)....................... Needed for L Frame production.................. Total metal needed for production; to be purchased (ft.)................................. x Price per foot........................................... Cost of metal strips to be purchased........... Glass sheets: S frames to be produced............................. x glass quantity per unit (sheets)................. Needed for S Frame production.................. L frames to be produced............................. x glass quantity per unit (sheets.)................ Needed for L Frame production.................. Total glass needed for production:.............. Add: Desired ending inventory................... Total glass needs......................................... Less: Expected beginning inventory............ Glass to be purchased.................................. X Price per glass sheets............................... Cost of glass to be purchased...................... Total raw-material purchases (metal and glass).................................
5.
Entire Quarter
Year
10,400
10,400
Entire Quarter
Year
Cash disbursements budget: 20x1 1st 2nd Quarter
Raw-material purchases: Cash payments for purchases during the current quarter......... .. Cash payments for purchases during the preceding quarter....... Total cash payments for raw-material purchases...................... . Direct-labor: Frames produced (Sand L) X direct-labor hours per frame................................................... Direct-labor hours to be used.................................................... . X Rate per direct-labor hour....................................................... Total cash payments for direct labor.......................................... Manufacturing overhead: Indirect material.................................................................... ..... Indirect labor......................................................................... ..... Other........................................................................................... Total cash payments for manufacturing overhead................ ..... Cash payments for selling and administrative expenses............... Total cash disbursements...............................................................
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3rd Quarter
4th Quarter
6.
Summary cash budget: 20x1 1st 2nd Quarter
3rd Quarter
4th Quarter
Entire Quarter
Year
Cash receipts (from schedule 2)…………………… Less: Cash disbursements (from schedule 5)................................ Change in cash balance due to operations..................................... Payment of dividends.................................................................... Proceeds from bank loan (1/2/x1)................................................. Purchase of equipment............................................................. ..... Quarterly installment on loan principal......................................... Quarterly interest payment........................................................... . Change in cash balance during the period..................................... Cash balance, beginning of period........................................... ..... Cash balance, end of period....................................................... ...
7. Prepare a budgeted schedule of cost of good manufactured and sold for the year 20x1. Note: Budgeted and actual MOH will be equal. 8. Prepare Frame-It’s budgeted income statement for 20x1. (Ignore income taxes.) 9. Prepare Frame-It’s budgeted statement of retained earnings for 20x1. 10. Prepare Frame-It’s budgeted balance sheet as of December 31, 20x1.
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