Comprehensive Master Budget Case

Pu Dong Photo Company

Ran Zi Yao, president of Pu Dong Photo Company, was just concluding a budget meeting with his senior staff. It was November of 2Ox4, and the group was discussing preparation of the firm's master budget for 2Ox5. "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.

Pu Dong Photo 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, Pu Dong 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 5,000 units each quarter over the previous quarter. For example, S frame sales in the first quarter of 2Ox5 are expected to be 55,000 units.

2. Pu Dong 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 2Ox5.

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.

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 2Ox5 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 / ¥2 / ¥2
Manufacturing overhead:
.1 direct-labor hour x ¥10 per hour / ¥1 / ¥1
Total manufacturing cost per unit / ¥7 / ¥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 / ¥10,200 / ¥11,200 / ¥12,200 / ¥13,200 / ¥46,800
Indirect Labor / 40,800 / 44,800 / 48,800 / 52,800 / 187,200
Other overhead / 31,000 / 36,000 / 41,000 / 46,000 / 154,000
Depreciation / 20,000 / 20,000 / 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 quarter incurred except for depreciation.

9. Pu Dong 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.

11. Pu Dong Photo’s projected balance sheet as of December 31, 20x4, 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

Required: Prepare Pu Dong Photo Company’s master budget for 20x5 by completing the following schedules and statements.

Sales budget:

20x4 / 20x5
4th Quarter / 1st Quarter / 2nd Quarter / 3rd Quarter / 4th Quarter / Entire Year
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

Cash receipts budget:

20x5
1st Quarter / 2nd Quarter / 3rd Quarter / 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

Production budget:

20x4 / 20x5
4th
Quarter / 1st Quarter / 2nd Quarter / 3rd
Quarter / 4th
Quarter / Entire Year
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

Direct-material budget:

20x4 / 20x5
4th Quarter / 1st Quarter / 2nd Quarter / 3rd Quarter / 4th Quarter / Entire Year
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 / 10,400 / 10,400
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)

Cash disbursements budget:

20x5
1st Quarter / 2nd Quarter / 3rd Quarter / 4th Quarter / Entire Year
Raw-material purchases:
Cash payments for purchases during the current quarter
Cash payments for purchases during the preceding quarter
TOTAL cash payments for raw-material 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

Summary cash budget:

20x5
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/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

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).

Prepare Pu Dong Photo’s budgeted income statement for 20x5. (Ignore income taxes.)

Prepare Pu Dong Photo’s budgeted statement of retained earnings for 20x5.

Prepare Pu Dong Photo’s budgeted balance sheet as of December 31, 20x5.