Chapter 9, Problem 47C

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, Vaughn 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, 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. Emily Jackson, Frame-It’s controller, is in charge of preparing the master budget for 20x 1. She has gathered the following information:

1. 1. 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.
2. 2. 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.)
3. 3. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x1.
4. 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. Since metal strips are purchased locally, Frame-It buys them on a just-in-time basis; inventory is negligible.
5. 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. 6. Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible.
7. 7. Projected production costs in 20x1 are as follows:

1. 8. The predetermined overhead rate is $10 per direct-labor hour. The following production overhead costs are budgeted for 20x1.

All of these costs will be paid in cash during the quarter incurred except for the depreciation charges.

1. 9. Frame-It’s quarterly selling and administrative expenses are $100,000, paid in cash.
2. 10. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.
3. 11. Frame-It’s projected balance sheet as of December 31, 20x0, follows:

Required: Prepare Frame-It Company’s master budget for 20x1 by completing the following schedules and statements.

1. 1. Sales budget:

1. 2. Cash receipts budget:

1. 3. Production budget:

1. 4. Direct-material budget:

1. 5. Cash disbursements budget:

1. 6. Summary cash budget:

1. 7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. (Hint: In the budget, actual and applied overhead will be equal.)
2. 8. Prepare Frame-It’s budgeted income statement for 20x1. (Ignore income taxes.)
3. 9. Prepare Frame-It’s budgeted statement of retained earnings for 20x1.
4. 10. Prepare Frame-It’s budgeted balance sheet as of December 31, 20x1.

To determine

Prepare a sales budget.

Explanation of Solution

Sales budget: This budget is prepared by the organization for the yearly or monthly basis as per need. It includes all the estimated revenues from the entire operating source.

Sales budget is prepared to estimate or project the sales in dollars and units for a particular period of time.

Prepare a sales budget:

Table (1)

Working note 1:

20x0:

Calculate the amount of cash sales for 4^th quarter:

$\begin{array}{c}\text{Cash sales for 4th quarter = 40\% of total sales of 4th quarter}\\ \text{=\$1,100,000}\times \text{40\%}\\ =\$440,000\end{array}$

Working note 2:

20x1:

Calculate the amount of cash sales for 1^st quarter:

$\begin{array}{c}\text{Cash sales for 1st quarter = 40\% of total sales of 1st quarter}\\ \text{=\$1,225,000}\times \text{40\%}\\ =\$490,000\end{array}$

Calculate the amount of cash sales for 2^nd quarter:

$\begin{array}{c}\text{Cash sales for 2nd quarter = 40\% of total sales of 2nd quarter}\\ \text{=\$1,350,000}\times \text{40\%}\\ =\$540,000\end{array}$

Calculate the amount of cash sales for 3^rd quarter:

$\begin{array}{c}\text{Cash sales for 3rd quarter = 40\% of total sales of 3rd quarter}\\ \text{=\$}1,475,\times 000\text{ 40\% }\\ =\$590,000\end{array}$

Calculate the amount of cash sales for 4^th quarter:

$\begin{array}{c}\text{Cash sales for 4th quarter = 40\% of total sales of 4th quarter}\\ \text{=\$}1,600,\times 000\text{ 40\% }\\ =\$640,000\end{array}$

Working note 3:

20x0:

Calculate the amount of sales on account for 4^th quarter:

$\begin{array}{c}\text{Sales on account for 4th quarter = 60\% of total sales of 4th quarter}\\ \text{=\$1,100,000}\times 6\text{0\%}\\ =\$660,000\end{array}$

Working note 2:

20x1:

Calculate the amount of sales on account for 1^st quarter:

$\begin{array}{c}\text{Sales on account for 1st quarter = 60\% of total sales of 1st quarter}\\ \text{=\$1,225,000}\times 6\text{0\%}\\ =\$735,000\end{array}$

Calculate the amount of sales on account for 2^nd quarter:

$\begin{array}{c}\text{Sales on account}\text{for 2nd quarter = 60\% of total sales of 2nd quarter}\\ \text{=\$1,350,000}\times 6\text{0\%}\\ =\$810,000\end{array}$

Calculate the amount of sales on account for 3^rd quarter:

$\begin{array}{c}\text{Sales on account for 3rd quarter = 60\% of total sales of 3rd quarter}\\ \text{=\$}1,475,\times 000\text{ 60\% }\\ =\$885,000\end{array}$

Calculate the amount of sales on account for 4^th quarter:

$\begin{array}{c}\text{Sales on account for 4th quarter = 60\% of total sales of 4th quarter}\\ \text{=\$}1,600,\times 000\text{ 60\% }\\ =\$960,000\end{array}$

To determine

Prepare a cash receipts budget.

Explanation of Solution

Cash receipts Budget: The cash budget is a part of the financial statements which is a plan for the cash receipts for a particular accounting period. This budget gives an estimation of all the cash inflows of a business for the given financial period.

Prepare a cash receipts budget:

Table (2)

Working note 1:

20x1:

Calculate the cash collection from credit sales made during current quarter:

1^st quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 1}}^{\text{st}}\text{quarter}\end{array}\}\text{= 80\% of 1st quarter credit sales}\\ \text{=\$735,000}\times 8\text{0\%}\\ =\$588,000\end{array}$2^nd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 2}}^{\text{nd}}\text{quarter}\end{array}\}\text{= 80\% of 2nd quarter credit sales}\\ \text{=\$810,000}\times 8\text{0\%}\\ =\$648,000\end{array}$

3^rd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 3}}^{\text{rd}}\text{quarter}\end{array}\}\text{= 80\% of 3rd quarter credit sales}\\ \text{=\$885,000}\times 8\text{0\%}\\ =\$708,000\end{array}$

4^th quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 4}}^{\text{th}}\text{quarter}\end{array}\}\text{= 80\% of 4th quarter credit sales}\\ \text{=\$960,000}\times 8\text{0\%}\\ =\$768,000\end{array}$

Working note 2:

20x1:

Calculate the cash collection from credit sales made during previous quarter:

1^st quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 1}}^{\text{st}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{20x0 4th quarter}\right)\\ \text{=\$660,000}\times 2\text{0\%}\\ =\$132,000\end{array}$

2^nd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 2}}^{\text{nd}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{1st quarter}\right)\\ \text{=\$735,000}\times 2\text{0\%}\\ =\$147,000\end{array}$

3^rd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 3}}^{\text{rd}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{2nd quarter}\right)\\ \text{=\$810,000}\times 2\text{0\%}\\ =\$162,000\end{array}$

4^th quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 4}}^{\text{th}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{3rd quarter}\right)\\ \text{=\$885,000}\times 2\text{0\%}\\ =\$177,000\end{array}$

To determine

Prepare a production budget.

Explanation of Solution

Production Budget: The production budget refers to that budget which forecasts the production for the future accounting period. The budgeted production for any financial period is planned by combining the forecasted unit of sales and the finished goods inventory and deducting the beginning goods inventory.

Prepare a production budget:

Table (3)

To determine

Prepare a direct-material budget.

Explanation of Solution

Direct material budget:  This budget shows the expected requirement of raw material (in units and in dollar amount) for the budgeted period.

Prepare a direct-material budget:

Table (4)

To determine

Prepare a cash disbursement budget.

Explanation of Solution

Cash payments for purchases: This Schedule is prepared for the estimation of the cash payment for purchase for the period. This includes all probable cash payment.

Budgeted cash disbursement: Budgeted cash disbursements are the cash outflows expected for a budgeted period.

Prepare a cash disbursement budget:

Table (5)

Working note 1:

20x1:

Calculate the cash payments for purchase during current quarter:

1^st quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ {\text{purchase during 1}}^{\text{st}}\text{quarter}\end{array}\}\text{= 80\% of 1st quarter purchases}\\ \text{=\$552,000}\times 8\text{0\%}\\ =\$441,600\end{array}$

2^nd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ {\text{purchase during 2}}^{\text{nd}}\text{quarter}\end{array}\}\text{= 80\% of 2nd quarter purchases}\\ \text{=\$607,000}\times 8\text{0\%}\\ =\$485,600\end{array}$

3^rd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ {\text{purchase during 3}}^{\text{rd}}\text{quarter}\end{array}\}\text{= 80\% of 3rd quarter purchases}\\ \text{=\$662,000}\times 8\text{0\%}\\ =\$529,600\end{array}$

4^th quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ {\text{purchase during 4}}^{\text{th}}\text{quarter}\end{array}\}\text{= 80\% of 4th quarter purchases}\\ \text{=\$717,000}\times 8\text{0\%}\\ =\$573,600\end{array}$

Working note 2:

20x1:

Calculate the cash payments for purchase during previous quarter:

1^st quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 1}}^{\text{st}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{20x0 4th quarter}\right)\\ \text{=\$497,000}\times 2\text{0\%}\\ =\$99,400\end{array}$

2^nd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 2}}^{\text{nd}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{1st quarter}\right)\\ \text{=\$552,000}\times 2\text{0\%}\\ =\$110,400\end{array}$

3^rd quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 3}}^{\text{rd}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{2nd quarter}\right)\\ \text{=\$607,000}\times 2\text{0\%}\\ =\$121,400\end{array}$

4^th quarter:

$\begin{array}{c}\begin{array}{l}\text{Cash collection from credit sales }\\ {\text{made during 4}}^{\text{th}}\text{quarter}\end{array}\}\text{= 20\% of previous quarter credit sales}\left(\text{3rd quarter}\right)\\ \text{=\$662,000}\times 2\text{0\%}\\ =\$134,400\end{array}$

To determine

Prepare a cash budget.

Explanation of Solution

Cash Budget: Cash budget shows the expected cash inflows and cash outflows for a budgeted period.

Prepare a cash budget:

Table (6)

Working note 1:

20x1:

Calculate the quarterly interest payment:

1^st quarter:

$\begin{array}{c}\begin{array}{l}\text{Quarterly interest payment}\\ {\text{for 1}}^{\text{st}}\text{quarter}\end{array}\}\text{= }\left(\begin{array}{l}\text{Proceeds from bank loan}\times \\ \text{Interest rate for each quarter}\times \frac{\text{1}}{4}\end{array}\right)\\ \text{=\$1,000,000}\times 1\text{0\%}\times \frac{\text{1}}{4}\\ =\$25,000\end{array}$

2^nd quarter:

$\begin{array}{c}\begin{array}{l}\text{Quarterly interest payment}\\ {\text{for 2}}^{\text{nd}}\text{quarter}\end{array}\}\text{= }\left(\begin{array}{l}\text{Proceeds from bank loan after 1st installment}\times \\ \text{Interest rate for each quarter}\times \frac{\text{1}}{4}\end{array}\right)\\ \text{=\$750,000}\times 1\text{0\%}\times \frac{\text{1}}{4}\\ =\$18,750\end{array}$

3^rd quarter:

$\begin{array}{c}\begin{array}{l}\text{Quarterly interest payment}\\ {\text{for 3}}^{\text{rd}}\text{quarter}\end{array}\}\text{= }\left(\begin{array}{l}\text{Proceeds from bank loan after 2nd installment}\times \\ \text{Interest rate for each quarter}\times \frac{\text{1}}{4}\end{array}\right)\\ \text{=\$500,000}\times 1\text{0\%}\times \frac{\text{1}}{4}\\ =\$12,500\end{array}$

4^th quarter:

$\begin{array}{c}\begin{array}{l}\text{Quarterly interest payment}\\ {\text{for 4}}^{\text{th}}\text{quarter}\end{array}\}\text{= }\left(\begin{array}{l}\text{Proceeds from bank loan after 3rd installment}\times \\ \text{Interest rate for each quarter}\times \frac{\text{1}}{4}\end{array}\right)\\ \text{=\$250,000}\times 1\text{0\%}\times \frac{\text{1}}{4}\\ =\$6,250\end{array}$

To determine

Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1.

Explanation of Solution

Cost of goods sold budget: The cost of goods sold budget is the budget prepared to estimate the direct materials, labor and overhead for the coming financial period. This budget is the part of the operating budget.

Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1:

Table (7)

Working note 1:

Calculate the cost of total production overhead applied:

Cost of total production overhead applied
Particulars	Amount ($)
Total number of frames produced		468,000
× Direct-labor hours per frame		×.1
Total direct-labor hours		46,800
× Predetermined overhead rate per hour		×$10
Total production overhead applied		$468,000

Table (8)

Working note 2:

Calculate the cost of goods sold manufactured:

Particulars	S Frames	L Frames
Frames produced	254,000	214,000
× Production cost per unit	× $7	× $10
Total production cost	$1,778,000	$2,140,000
Grand total (S frames and L frames)	$3,918,000

Table (9)

Working note 3:

Calculate the finished goods inventory on 12/31/x1:

Particulars	S Frames	L Frames
Projected inventory on 12/31/x1	15,000	13,000
Production cost per unit	× $7	× $10
Cost of ending inventory	$ 105,000	$ 130,000
Total cost of ending inventory (S and L)	$235,000

Table (10)

Working note 4:

Calculate the cost of goods sold:

Particulars	S Frames	L Frames
Frames sold	250,000	210,000
Production cost per unit	× $7	× $10
Cost of goods sold	$1,750,000	$2,100,000
Total cost of goods sold (S and L)	$3,850,000

Table (11)

To determine

Prepare F-IT Company budgeted income statement for 20x1.

Explanation of Solution

Budgeted Income Statement: The statement that indicates the expected profitability of operations for the budget period is known as the budgeted income statement. It also provides the basis for evaluating the performance of a company, and act as a call to action.

Prepare budgeted income statement:

F-IT Company
Budgeted Income Statement
For the Year Ended December 31, 20x1
Particulars	Amount ($)	Amount ($)
Sales revenue		$5,650,000
Less: Cost of goods sold		3,850,000
Gross margin		$1,800,000
Selling and administrative expense	$400,000
Interest expense	62,500	462,500
Net income		$1,337,500

Table (12)

To determine

Prepare F-IT Company budgeted statement of retained earnings for 20x1.

Explanation of Solution

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

F-IT Company
Budgeted Statement of Retained Earnings
For the Year Ended December 31, 20x1
Particulars	Amount ($)	Amount ($)
Retained earnings, 12/31/x0	$3,353,800
Add: Net income	1,337,500
Subtotal		4,691,300
Less: Dividends		200,000
Retained earnings, 12/31/x1		$4,491,300

Table (13)

To determine

Prepare F-IT Company budgeted balance sheet as of December 31,20x1.

Explanation of Solution

Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.

Prepare F-IT Company budgeted balance sheet as of December 31,20x1:

F – IT Company
Budgeted Balance Sheet
December 31, 20x1
Assets	Amount ($)
Cash	204,500
Accounts receivable	192,000
Inventory:
Raw material	83,200
Finished goods	235,000
Plant and equipment (net of accumulated depreciation	8,920,000
Total assets	$9,634,700
Accounts payable	143,400
Common stock	5,000,000
Retained earnings	4,491,300
Total liabilities and stockholders' equity	$9,634,700

Table (14)

Working note 1:

Calculate the amount of accounts receivable:

$\begin{array}{c}\text{Accounts receivable = 20\% on fourth quarter sales on account}\\ \text{=\$960,000}\times \text{ 20\%}\\ =\$192,000\end{array}$

Working note 2:

Calculate the amount of plant and equipment:

$\begin{array}{c}\text{Plant and equipment =}\left(\begin{array}{l}\text{Plant and equipmen balance}\\ \text{ +Cost of robot}-\\ \text{Depreciation amount }\end{array}\right)\\ =\left(\begin{array}{l}\$8,000,000+\$1,000,000\\ -\$80,000\end{array}\right)\\ =\$8,920,000\end{array}$

Working note 3:

Calculate the amount of accounts payable:

$\begin{array}{c}\text{Accounts payable = 20\% on fourth quarter purchases on account}\\ \text{=\$717,000}\times \text{ 20\%}\\ =\$143,400\end{array}$