Portraits Unlimited Company Budgeting Project
Karl Richards, President of Portraits Unlimited Company, was just concluding a budget meeting with his senior staff. It was October 2013, and the group was discussing preparation of the firm's master budget for 2014. "I've decided to go ahead and purchase the industrial robot we've been talking about. We'll make the acquisition on January 3 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, Richards replied as follows: "The robot will cost $250,000. There will also be an additional $50,000 in ancillary equipment to be purchased. We'll finance these purchases with a one-year $300,000 loan from Mohill Bank and Trust Company on January 2. I've negotiated a repayment schedule of four equal installments on the last day of each quarter. The interest rate will be 10 percent per annum on the reducing balance basis, and interest payments will be quarterly as well." With that the meeting broke up, and the budget process was on.
Portraits Unlimited Company is a manufacturer of metal picture Portraits. The firm's two product lines are designated as S (small Portraits; 5 x 7 inches) and L (large Portraits; 8 x 10 inches). The primary raw materials are flexible metal strips and 9-inch by 24-inch glass sheets. Each S Portrait requires a 2-foot metal strip; and an L Portrait requires a 3-foot strip. Allowing for normal breakage and scrap glass, the company can get either four S Portraits or two L Portraits out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials.
Fiona Williams, Portraits Unlimited's Controller is in charge of preparing the master budget for 2014. She has gathered the following information:
1. Sales in the fourth quarter are expected to be 50,000 S Portraits and 40,000 L Portraits. The sales manager predicts that of 2013 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 Portraits sales in first quarter of 2014 are expected to be 55,000 units.
2. Portraits Unlimited Company 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.
3. The S Portrait sells for $10, and the L Portrait sells for $15. These prices are expected to hold constant throughout 2014.
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. Assume an ending inventory of glass sheets of 10,400 for the fourth quarter of 2014. 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 2014 are as follows:
S Portrait L Portrait
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 labour:
0.1 hour @ $20 per hour 2 2
Manufacture overhead
0.1 direct-labour hour x $10 per hour 1____ __ 1___
Total manufacturing cost per unit $7 $10___
8. The following manufacturing overhead costs are budgeted for 2014.
|
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|
Indirect material
|
10,200.00
|
11,200.00
|
12,200.00
|
13,200.00
|
|
Indirect labour
|
40,800.00
|
44,800.00
|
48,800.00
|
52,800.00
|
|
Other overhead
|
31,000.00
|
36,000.00
|
41,000.00
|
46,000.00
|
|
Depreciation
|
20,000.00
|
20,000.00
|
20,000.00
|
20,000.00
|
|
Total overhead costs
|
$102,000.00
|
$112,000.00
|
$122,000.00
|
$132,000.00
|
9. The following relates to past selling and administrative expenses. (Use regression analysis to derive a cost function and use this cost function to estimate selling and administrative cost).
|
Year
|
Quarters
|
S & L Sales Units
|
Selling and Admin cost
|
|
2012
|
1
|
80,000
|
$200,000.00
|
|
|
2
|
70,000
|
180,000.00
|
|
|
3
|
60,000
|
150,000.00
|
|
|
4
|
100,000
|
250,000.00
|
|
2013
|
1
|
88,000
|
210,000.00
|
|
|
2
|
74,000
|
180,000.00
|
|
|
3
|
98,000
|
235,000.00
|
10. Richards anticipates that dividend of $50,000 will be declared and paid in cash each quarter.
11. Portraits Unlimited Company projected balance sheet as of December 31, 2013, follows:
$
Plant and equipment (net of accumulated depreciation) 8,000,000
Cash 95,000
Accounts receivable 132,000
Inventory:
Raw material 59,200
Finished goods 167,000
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 Portraits Unlimited Company master budget for each quarter of 2014 and in total for the year by completing the following schedules and statements:
(a) Sales budget (prepare 4th quarter of 2013 as well).
(b) Schedule of cash collected from customers.
(c) Production budget (prepare 4th quarter of 2013 as well)
(d) Direct-material budget (prepare 4th quarter of 2013 as well)
(e) Schedule of cash disbursement to suppliers for direct material.
(f) Direct labour budget.
(g) Manufacture overhead budget.
(h) Selling and administrative budget. (Round off variable cost to 2 decimal places and fixed cost to the nearest whole number). Show regression computation
(i) Cash budget
(j) Portraits Unlimited Company Budgeted Cost of Goods Manufactured and Sold for the year 2014. (Show budget for the entire year only).
(k) Portraits Unlimited Company Budgeted Income Statement for 2014. (Show budget for the entire year only).
(l) Portraits Unlimited Company Budgeted Statement of Retained Earnings for 2014. (Show budget for the entire year only).
(m) Portraits Unlimited Company Budgeted Balance Sheet as of December 31, 2014.