Please prepare Frame-It Company’s summary cash budget for 20x1. (Amounts to be d

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Please prepare Frame-It Company’s summary cash budget for 20x1. (Amounts to be deducted should be indicated with a minus sign.)

Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20×0, and the group was discussing preparation of the firm’s master budget for 20×1. “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 20×1. She has gathered the following information:

Sales in the fourth quarter of 20×0 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 20×1 are expected to be 55,000 units.

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.)

The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold constant throughout 20×1.

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.

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.

Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is negligible.

Projected production costs in 20×1 are as follows:

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.

Frame-It’s quarterly selling and administrative expenses are $100,000, paid in cash.

Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.

Frame-It’s projected balance sheet as of December 31, 20×0, 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 Production overhead: 0.1 direct-labor hour × $10 per hour 1 1 Total production cost per unit $ 7 $ 10 20x1 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire 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

Explanation / Answer

Cash Receipts Budgets,

Total

Cash sales

490,000

540,000

590,000

640,000

22,60,000

Cash collections from credit sales

made during current quarter(80% of Current Quarter’s credit sales)

588,000

648,000

708,000

768,000

27,12,000

Cash collections from credit sales made during previous quarter(20% prev. quarter credit sales)

132,000

147,000

162,000

177,000

618,000

Total Cash Receipts

12,10,000

13,35,000

14,60,000

15,85,000

55,90,000

Cash Disbursement Budget,

Total

Raw material pur.

Cash payments for purchases(Related to 80% of Current Quarter)

441600

485600

529600

573600

2030400

Cash payments for purchases(Related to 20% of Prev. Quarter)

99400

110400

121400

132400

463600

Total for raw materials purchases

541000

596000

651000

706000

2494000

Direct Labor

Frames produced*DLH per frame*Rate per DLH

102000*0.1*20

=204000

112000*0.1*20

=224000

112000*0.1*20

=224000

132000*0.1*20

=264000

936000

Manufacturing OH

Indirect material

10200

11200

12200

13200

46800

Indirect Labor

40800

44800

48800

52800

187200

Other

31000

36000

41000

46000

154000

Total Cash Payments for MOH

82000

92000

102000

112000

388000

Cash payments for Admin& selling OH

100000

400000

Total cash Disbursements

927000

1012000

1097000

1182000

4218000

Summary of cash budget

Total

Cash receipts

1210000

1335000

1460000

1585000

5590000

Less: Cash Disbursement

-927000

-1012000

-1097000

-1182000

-4218000

Cash Balance

283000

323000

363000

403000

1372000

Dividend Payment

-50000

-200000

Bank Loan

1000000

Purchase of Equipment

-1000000

Quarterly installment on loan principal Payment

-250000

-1000000

Quarterly interest payment

-25000

-18750

-12500

-6250

-62500

Remaining Balance of cash

-42000

4250

50500

96750

109500

Opening Cash Balance

95000

53000

57250

107750

95000

Closing Cash Balance

53000

57250

107750

204500

Interest Calculation,

Q1 – 1,000,000*10%*3/12 = 25,000

Q2 – 750,000*10%*3/12 = 18,750

Q3 – 500,000*10%*3/12 = 12,500

Q4 – 250,000*10%*3/12 = 6,250

Total

Cash sales

490,000

540,000

590,000

640,000

22,60,000

Cash collections from credit sales

made during current quarter(80% of Current Quarter’s credit sales)

588,000

648,000

708,000

768,000

27,12,000

Cash collections from credit sales made during previous quarter(20% prev. quarter credit sales)

132,000

147,000

162,000

177,000

618,000

Total Cash Receipts

12,10,000

13,35,000

14,60,000

15,85,000

55,90,000

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