Comprehensive Master Budget Case
Frame-It Company
Ran Zi Yao, president of Frame-It Company, was just concluding a budget meeting with his
senior staff. It was November of 20x4, and the group was discussing preparation of the firm's
master budget for 20x5. "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, Ran Zi Yao replied as follows: "The
robot will cost $950,000. There will also be an additional $50,000 in ancillary equipment to be
purchased. We'll finance these purchases with a one-year $1,000,000 loan from Xin Sheng 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 X 7 inches) and L (large frames; 8 X 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, the company 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. Jiang Ao Mu, Frame-It Photo's controller, is in charge of preparing the master budget
for 2Ox5. She has gathered the following information:
1. Sales in the fourth quarter of 20x4 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 10,000 units each quarter over the previous quarter. For example, S
frame sales in the first quarter of 20x5 are expected to be 60,000 units.
2. Frame-It Photo'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 20x5.
4. The 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,
the company buys them on a just-in-time basis; inventory is negligible.
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5. All 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 with cash as needed. Work-in-process is negligible.
7. Projected manufacturing costs in 20x5 are as follows:
S Frame L Frame
Direct Material:
Metal strips:
S: 2 ft. @ $1 per foot
L: 3 ft. @ $1 per foot
Glass sheets:
S: ¼ sheet @ $8 per sheet
L: ½ sheet @ $8 per sheet
Direct Labor:
.1 hour @ $20
Manufacturing overhead:
.1 direct-labor hour x $10 per hour
Total manufacturing cost per unit
$2
$3
$2
$4
$2
$2
$1
$7
$1
$10
8. The predetermined overhead rate is $10 per direct-labor hour. The following
manufacturing-overhead costs are budgeted for 20x5.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year
Indirect Material
$11,400
$13,400
$15,400
$17,400
$57,600
Indirect Labor
45,600
53,600
61,600
69,600
230,400
Other overhead
37,000
47,000
57,000
67,000
208,000
Depreciation
20,000
20,000
20,000
20,000
80,000
TOTAL OVERHEAD $114,000 $134,000
$154,000
$174,000 $576,000
All of these costs will be paid in cash during the quarter incurred except for depreciation.
9. Frame-It Photo’s quarterly selling and administrative expenses are $100,000, paid in cash.
10. Jiang Ao Mu anticipates that dividends of $50,000 will be declared and paid in cash each
quarter.
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11. Frame-It Photo’s projected balance sheet as of December 31, 20x4, follows:
Cash
Accounts receivable
Inventory
Raw material
Finished goods
Plant and equipment (net of accumulated depreciation)
TOTAL ASSETS
$ 95,000
132,000
66,400
184,000
7,979,200
$ 8,456,600
Accounts payable
Common stock
Retained earnings
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
$ 102,800
5,000,000
3,353,800
$ 8,456,600
Required: Prepare Frame-It Company’s master budget for 20x5 by completing the following
schedules and statements.
1. Sales budget:
20x4
4th
Quarter
1st
Quarter
2nd
Quarter
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
3
20x5
3rd
Quarter
4th
Quarter
Entire
Year
2. Cash receipts budget:
st
1 Quarter
nd
2 Quarter
20x5
3 Quarter
rd
4th Quarter
Entire
Year
4th
Quarter
Entire
Year
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:
20x4
th
4
Quarter
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
4
st
1
Quarter
nd
2
Quarter
20x5
3rd
Quarter
4. Direct-material budget:
20x4
4th
Quarter
1st
Quarter
2nd
Quarter
20x5
3rd
Quarter
4th
Quarter
Entire
Year
14,300
14,300
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
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;
to be purchased (sheets)
ADD: Desired ending inventory
Total glass needs
LESS: Expected beginning
inventory
Glass to be purchased
x price per glass sheet
Cost of glass to be purchased
TOTAL raw-material purchases
(metal and glass)
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5. Cash disbursements budget:
1st
Quarter
Raw-material purchases:
Cash payments for purchases during
the current quarter
Cash payments for purchases during
the preceding quarter
TOTAL cash payments for rawmaterial purchases
Direct labor:
Frames produced (S and L)
x Direct-labor hours to be used
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
6
2nd
Quarter
20x5
3rd
Quarter
4th
Quarter
Entire
Year
6. Summary cash budget:
20x5
st
1
Quarter
nd
2
Quarter
rd
3
Quarter
4th
Quarter
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/x5)
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 goods manufactured and sold for the year 20x5.
(Hint: In the budget, actual and applied overhead will be equal).
8. Prepare Frame-It Photo’s budgeted income statement for 20x5. (Ignore income taxes.)
9. Prepare Frame-It Photo’s budgeted statement of retained earnings for 20x5.
10. Prepare Frame-It Photo’s budgeted balance sheet as of December 31, 20x5.
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Entire
Year