Concept explainers
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
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. 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. 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. The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20x1.
- 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. 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 20x1 are as follows:
- 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.
- 9. Frame-It’s quarterly selling and administrative expenses are $100,000, paid in cash.
- 10. Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.
- 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. Sales budget:
- 2. Cash receipts budget:
- 3. Production budget:
- 4. Direct-material budget:
- 5. Cash disbursements budget:
- 6. Summary
cash budget :
- 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.)
- 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.
1.
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 4th quarter:
Working note 2:
20x1:
Calculate the amount of cash sales for 1st quarter:
Calculate the amount of cash sales for 2nd quarter:
Calculate the amount of cash sales for 3rd quarter:
Calculate the amount of cash sales for 4th quarter:
Working note 3:
20x0:
Calculate the amount of sales on account for 4th quarter:
Working note 2:
20x1:
Calculate the amount of sales on account for 1st quarter:
Calculate the amount of sales on account for 2nd quarter:
Calculate the amount of sales on account for 3rd quarter:
Calculate the amount of sales on account for 4th quarter:
2.
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:
1st quarter:
3rd quarter:
4th quarter:
Working note 2:
20x1:
Calculate the cash collection from credit sales made during previous quarter:
1st quarter:
2nd quarter:
3rd quarter:
4th quarter:
3.
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)
4.
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)
5.
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:
1st quarter:
2nd quarter:
3rd quarter:
4th quarter:
Working note 2:
20x1:
Calculate the cash payments for purchase during previous quarter:
1st quarter:
2nd quarter:
3rd quarter:
4th quarter:
6.
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:
1st quarter:
2nd quarter:
3rd quarter:
4th quarter:
7.
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) | $3,850,000 |
Table (11)
8.
Prepare F-IT Company budgeted income statement for 20x1.
Explanation of Solution
Budgeted Income Statement: The statement that indicates the expected profitability of operations for the budget period is known as the budgeted income statement. It also provides the basis for evaluating the performance of a company, and act as a call to action.
Prepare budgeted income statement:
F-IT Company | ||
Budgeted Income Statement | ||
For the Year Ended December 31, 20x1 | ||
Particulars | Amount ($) | 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 | $1,337,500 |
Table (12)
9.
Prepare F-IT Company budgeted statement of retained earnings for 20x1.
Explanation of Solution
Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.
F-IT Company | ||
Budgeted Statement of Retained Earnings | ||
For the Year Ended December 31, 20x1 | ||
Particulars | Amount ($) | 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 | $4,491,300 |
Table (13)
10.
Prepare F-IT Company budgeted balance sheet as of December 31,20x1.
Explanation of Solution
Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.
Prepare F-IT Company budgeted balance sheet as of December 31,20x1:
F – IT Company | |
Budgeted Balance Sheet | |
December 31, 20x1 | |
Assets | Amount ($) |
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:
Working note 2:
Calculate the amount of plant and equipment:
Working note 3:
Calculate the amount of accounts payable:
Want to see more full solutions like this?
Chapter 9 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
- Adams Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, year 1. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks. Required October sales are estimated to be $200,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 25 percent per month. Prepare a sales budget. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $12,000. Assume that all purchases are made…arrow_forwardMunoz Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, year 1. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks. Required a. October sales are estimated to be $340,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 20 percent per month. Prepare a sales budget. b. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts. c. The cost of goods sold is 70 percent of sales. The company desires to maintain a minimum ending inventory equal to 20 percent of the next month's cost of goods sold. However, ending inventory of December is expected to be $12,900. Assume that all purchases are made…arrow_forwardVictor Inc. has just received its sales and expense report for December, which follows. Item Amount Sales commissions $250,000 Sales staff salaries 100,000 Telephone and mailing 30,000 Building lease payment 60,000 Heat, light, and water 15,000 Packaging and delivery 30,000 Depreciation 25,000 Marketing consultants 10,000 Sales 600,000 You have been asked to develop budgeted costs for the coming year. Since this month is typical, you decide to prepare an estimated budget for a typical month in the coming year and you uncover the following additional data: • Sales volume is expected to increase by 20 percent. • Sales prices are expected to decrease by 10 percent. • Commissions are based on a percentage of selling price. • Sales staff salaries will increase 8 percent next year regardless of sales volume. • Building rent is based on a five-year lease that expires in three years. • Telephone and mailing costs are scheduled to decrease by 5 percent even with no change in sales volume.…arrow_forward
- Eliot Sprinkler Systems produces equipment for lawn irrigation. One of the parts used in selected Eliot equipment is a specialty nozzle. The budgeting team is now determining the purchase requirements and monthly cash disbursements for this part. Eliot wishes to have in stock enough nozzles to use for the coming month. On August 1, the company has 17,100 nozzles in stock, although the latest estimate for August production indicates a requirement for only 15,600 nozzles. Total uses of the nozzle are expected to be 15,300 in September and 16,140 in October. Nozzles are purchased at a wholesale price of $11. Eliot pays 25 percent of the purchase price in cash in the month when the parts are delivered. The remaining 75 percent is paid in the following month. Eliot purchased 24,000 parts in July. Required: a. Estimate purchases of the nozzle (in units) for August and September. b. Estimate the cash disbursements for nozzles in August and September. Complete this question by entering your…arrow_forwardEliot Sprinkler Systems produces equipment for lawn irrigation. One of the parts used in selected Eliot equipment is a specialty nozzle. The budgeting team is now determining the purchase requirements and monthly cash disbursements for this part. Eliot wishes to have in stock enough nozzles to use for the coming month. On August 1, the company has 18,700 nozzles in stock, although the latest estimate for August production indicates a requirement for only 18,800 nozzles. Total uses of the nozzle are expected to be 18,500 in September and 19,340 in October. Nozzles are purchased at a wholesale price of $27. Eliot pays 25 percent of the purchase price in cash in the month when the parts are delivered. The remaining 75 percent is paid in the following month. Eliot purchased 40,000 parts in July. Required: Estimate purchases of the nozzle (in units) for August and September. Estimate the cash disbursements for nozzles in August and September.arrow_forwardOptima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2019). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information: a. Fourth-quarter sales for 2018 are 55,000 units. b. Unit sales by quarter (for 2018) are projected as follows: First quarter 65,000 Second quarter 70,000 Third quarter 75,000 Fourth quarter 90,000 The selling price is $400 per unit. All sales are credit sales. Optima collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent is collected in the following quarter. There are no bad debts. c. There is no beginning…arrow_forward
- Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2019). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information: a. Fourth-quarter sales for 2018 are 55,000 units. b. Unit sales by quarter (for 2018) are projected as follows: First quarter 65,000 Second quarter 70,000 Third quarter 75,000 Fourth quarter 90,000 The selling price is $400 per unit. All sales are credit sales. Optima collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent is collected in the following quarter. There are no bad debts. c. There is no beginning…arrow_forwardYou have just been hired at ABC Manufacturing, and your supervisor has invited you to sit in on today's budget meeting. You are given a copy of the following proposed budget for next year to review. The budget is being used by ABC to plan for next year. Your supervisor tells you right before the meeting, "We always overestimate because the president always makes us cut the budget by 20%, and besides, I really want to go to that conference in Las Vegas next year.” He continued,” I have really worked hard this year and put in a lot of overtime so I deserve it." Discuss the ethical issues related to inflating the budget.arrow_forwardYou have just been hired at ABC Manufacturing, and your supervisor has invited you to sit in on today's budget meeting. You are given a copy of the following proposed budget for next year to review. The budget is being used by ABC to plan for next year. Your supervisor tells you right before the meeting, "We always overestimate because the president always makes us cut the budget by 20%, and besides, I really want to go to that conference in Las Vegas next year.” He continued,” I have really worked hard this year and put in a lot of overtime so I deserve it." Discuss the comment about the president cutting the budget each year in terms of proper leadership and control?arrow_forward
- You have just been hired at ABC Manufacturing, and your supervisor has invited you to sit in on today's budget meeting. You are given a copy of the following proposed budget for next year to review. The budget is being used by ABC to plan for next year. Your supervisor tells you right before the meeting, "We always overestimate because the president always makes us cut the budget by 20%, and besides, I really want to go to that conference in Las Vegas next year.” He continued,” I have really worked hard this year and put in a lot of overtime so I deserve it." Discuss if you think ABC Manufacturing is properly using the budget process to plan for next year's expenses.arrow_forwardCreate a budget for the following project: Blazer Company plans on purchasing new equipment to retool its manufacturing process. The project will involve the acquisition of equipment, installation of the new equipment, selling off the old equipment and training the workforce on the new equipment and processes. Blazer expects this project to take two years from beginning to end. Costs and expected income for the project are as shown below. Your task is to create a two-year cash budget for the project and compute a return on investment (ROI) for the project. You may ignore the time value of money in your calculation. You may make reasonable assumptions to complete this problem so long as you document them. Facts: a. The equipment to be purchased will cost $455,000. The equipment will be purchased and paid for at the beginning of Year 1. b. Installation cost will be $55,000. c. Blazer will purchase a maintenance contract for the equipment. The first year of maintenance is included in the…arrow_forwardAn engineer has a fluctuating future budget for the maintenance of a particular machine. During each of the first 5 years, $10, 000 per year will be budgeted. During the second 5 years, the annual budget will be $15, 000 per year. In addition, $5000 will be budgeted for an overhaul of the machine at the end of the fourth year, and again at the end of the eighth year. What uniform annual expenditure would be equivalent, if interest is 8% per year?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning