Jeffrey Vaughn, president of Frame-It Company, was justconcluding a budget meeting with his senior staff. It was Novemberof 20x0, and the group was discussing preparation of the firm’smaster budget for 20x1. “I’ve decided to go ahead and purchase theindustrial robot we’ve been talking about. We’ll make theacquisition on January 2 of next year, and I expect it will takemost of the year to train the personnel and reorganize theproduction process to take full advantage of the new equipment.”Inresponse to a question about financing the acquisition, Vaughnreplied as follows: “The robot will cost $1,000,000. We’ll financeit with a one-year $1,000,000 loan from Shark Bank and TrustCom-pany. I’ve negotiated a repayment schedule of four equalinstallments on the last day of each quarter. The interest ratewill be 10 percent, and interest payments will be quarterly aswell.” With that the meeting broke up, and the budget process wason.Frame-It Company is a manufacturer of metal picture frames. Thefirm’s two product lines are designated as S (small frames, 5×7inches) and L (large frames, 8×10 inches). The primary rawmaterials are flexible metal strips and 9-inch by 24-inch glasssheets. Each S frame requires a 2-foot metal strip; an L framerequires a 3-foot strip. Allowing for normal breakage and scrapglass, Frame-It can get either four S frames or two L frames out ofa glass sheet. Other raw materials, such as cardboard backing, areinsignificant in cost and are treated as indirect materials. EmilyJackson, Frame-It’s controller, is in charge of preparing themaster budget for 20x1. She has gathered the followinginformation:

1. Sales in the fourth quarter of 20x0 are expected to be 50,000S frames and 40,000 L frames. The sales manager predicts that overthe next two years, sales in each product line will grow by 5,000units each quarter over the previous quarter. For example, S framesales in the first quarter of 20x1 are expected to be 55,000units.

2. Frame-It’s sales history indicates that 60 percent of allsales are on credit, with the remainder of the sales in cash. Thecompany’s collection experience shows that 80 percent of the creditsales are collected dur-ing the quarter in which the sale is made,while the remaining 20 percent is collected in the followingquarter. (For simplicity, assume the company is able to collect 100percent of its accounts receivable.)

3. The S frame sells for $10, and the L frame sells for $15.These prices are expected to hold con-stant throughout 20x1.

4. Frame-It’s production manager attempts to end each quarterwith enough finished-goods inven-tory in each product line to cover20 percent of the following quarter’s sales. Moreover, an attemptis made to end each quarter with 20 percent of the glass sheetsneeded for the following quarter’s production. Since metal stripsare 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 onaccount, and 80 percent of each quarter’s purchases are paid incash during the same quarter as the purchase. The other 20 percentis paid in the next quarter.

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

7. Projected production 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:

.1 hour @ $20 per hour..............................................2 2

Production overhead:

.1 direct-labor hour × $10 per hour ...........................1 ???????????1

Total production cost per unit...................................$7 $10

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

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Entire Year

Indirect material ................................. $10,200$11,200 $12,200 $13,200 $46,800

Indirect labor ...................................... 40,80044,800 48,800 52,800 187,200

Other overhead .................................. 31,000 36,00041,000 46,000 154,000

Depreciation.......................................???????????????????? 20,00020,000??????????????????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 quarterincurred except for the depreciation charges.

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

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

11. 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...........................................................................................................................................$99,400

Common stock...............................................................................................................................................5,000,000

Retained earnings..........................................................................................................................................3,353,800

Total liabilities and stockholders’ equity.......................................................................................................$8,453,200

7. Prepare a budgeted schedule of cost of goods manufactured andsold for the year 20x1. (Hint: In the budget, actual and appliedoverhead 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 earningsfor 20x1.

10. Prepare Frame-It’s budgeted balance sheet as of December 31,20x1.

Budgets required:

sales budget

cash receipts budget

production budget

direct-material budget

cash disbursement budget

summary cash budget

budgeted schedule of costs of good manufactured and sold fotyeat 20x1

budgeted income statement 20x1

budgeted statement of retained earnings 20x1

budgeted balance sheet as of decemeber 20x1