The Amazing Building Company (ABC) is in the process of completing their annual budget for 20X1.
During November of 20x0, Amanda Brick, President was discussing the company’s master budget with
her staff. Brick updated the group that she has decided to go ahead and purchase the industrial robot they
have been considering. She plans to make the acquisition on January 2 of next year, and expects it will
take most of the year to train the personnel and reorganize the production process to take full advantage of
the new equipment.
When questioned about funding the purchase, Brick replied as follows: “The robot will cost $1,000,000.
We’ll finance it with a one-year $1,000,000 loan from National Savings and Loan. I’ve negotiated a
epayment schedule of four equal installments on the last day of each quarter. The interest rate will be
10%, and interest payments will be quarterly as well.” Therefore, the outstanding balance for all of Q1
would be $1,000,000 with a $250,000 payment due on the last day of Q1, $750,000 for all of Q2 with a
$250,000 payment due on the last day of Q2, etc. and being fully paid off by the end of the year.
ABC is a manufacturer of roof trusses. The firm’s two product lines are designated as S (small trusses, 15
feet long) and L (large trusses, 22 feet long). The primary raw material is dimensional lumber. Allowing
for normal
eakage and scrap lumber, ABC can get either four S trusses or two L trusses out of a crate of
lumber. Other raw materials, such as nails and glue, are insignificant in cost and are treated as indirect
materials. Jane Bean, ABC’s controller, is in charge of preparing the master budget for 20x1. She has
gathered the following information:
1. Sales in the fourth quarter of 20x0 are expected to be 60,000 S trusses and 70,000 L trusses. 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 truss sales in the first quarter of
20x1 are expected to be 65,000 units.
2. ABC’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.
3. The S truss sells for $12, and the L truss sells for $18. These prices are expected to hold constant
throughout 20x1.
4. ABC’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 crates of lumber needed for the following
quarter’s production, with Q4 20x1 desired ending inventory being 9,400 crates. Since metal
strips are purchased locally, ABC buys them on a just-in-time basis; inventory is negligible.
5. All of ABC’s direct materials 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. Projected production costs in 20x1 are as follows:
S Truss L Truss
Direct Material:
Crate of lumber:
S: 1/4 crate @ $6 per crate $1.50
L: 1/2 crate @ $6 per crate $3.00
Direct Labor:
.2 hour @ $20 per hour $4.00 $4.00
Production overhead:
.2 direct labor hour x $10 per hour $2.00 $2.00
Total production cost per unit $7.50 $9.00
7. The predetermined overhead rate is $10 per direct labor hour. The following production
overhead costs are budgeted for 20x1.
Q1 Q2 Q3 Q4 Entire Year
Indirect materials $ 8,200 $ 9,200 $ 10,200 $ 11,200 $ 38,800
Indirect labor 38, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,200
Other overhead 29, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,000
Depreciation 20, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,000
Total overhead $ 96,000 $106,000 $116,000 $126,000 $444,000
All of these costs will be paid in cash during the quarter incu
ed except for the depreciation charges.
8. ABC’s quarterly selling and administrative expenses are $125,000, paid in cash.
9. Bean anticipates that dividends of $60,000 will be declared and paid in cash each quarter.
10. ABC’s projected balance sheet as of December 31, 20x0, follows:
Cash $ 95,000
Accounts receivable XXXXXXXXXX,600
Inventory:
Raw material XXXXXXXXXX,200
Finished goods XXXXXXXXXX,000
Plant and equipment (net of accumulated depreciation) 7,856,800
Total Assets $8,415,600
Accounts payable $ 61,800
Common stock 5,000,000
Retained earnings 3,353,800
Total liabilities and stockholders’ equity $8,415,600
Required:
Prepare ABC’s master budget for 20x1 by completing the following schedules and statements
using the Excel template provided.
1. Sales budget
2. Cash receipts budget
3. Production budget
4. Direct materials and materials purchase budget
5. Direct labor budget
6. Overhead budget
7. Summary cash budget
8. Budgeted schedule of cost of goods manufactured and sold for the year 20x1
9. Budgeted income statement for 20x1
10. Budgeted statement of retained earnings for 20x1
11. Budgeted balance sheet as of December 31, 20x1.
Homework:
Please carefully read the following case. It provides an Excel template for the case that you can use, or you may create your own Excel spreadsheet if you choose. I will be checking that calculations are being made in Excel. For example, if you're multiplying two cells, then the result needs to show the multiplication of the two cells (rather than you using a calculator and multiplying the two numbers and manually entering the result to the third cell). The only typed numbers should be the assumptions; everything else should be calculated using functions.
Amazing Building Company
Prepare the company's master budget for 20x1 by completing the following schedules and statements in Excel. You may create your own spreadsheet or download the Master Budget Project Template (Excel). Please also refer to the textbook for the specific items to include.
1. Sales budget
2. Cash receipts budget
3. Production budget
4. Direct-materials budget
5. Cash disbursements budget
6. Summary cash budget
7. Budgeted schedule of cost of goods manufactured and sold for the year 20x1
8. Budgeted income statement for 20x1 (Ignore income taxes.)
9. Budgeted statement of retained earnings for 20x1
10. Budgeted balance sheet as of December 31, 20x1
Solution
Amazing Building Company
Master Budget
1. Sales Budget
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Yea
S truss unit sales
x S sales price
S truss sales revenie
L truss unit sales
x L sales price
L truss sales revenue
Total sales revenue
Cash sales*
Sales on account†
*40% of total sales.
†60% of total sales.
2. Cash receipts budget:
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Yea
Cash sales
Cash collections from credit sales
made during cu
ent quarter *
Cash collections from credit sales
made during previous quarter†
Total cash receipts
*80% of cu
ent quarter's credit sales.
†20% of previous quarter's credit sales.
3. Production budget:
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Yea
S truss:
Sales (in units)
Add: Desired ending inventory
Total units needed
Less: Expected beginning inventory
Units to be produced
L truss:
Sales (in units)
Add: Desired ending inventory
Total units needed
Less: Expected beginning inventory
Units to be produced
4. Direct materials and materials purchase budget
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Yea
Lumber sheets:
S truss to be produced
Lumber quantity per unit (crates)
Needed for S truss prodction
L truss to be produced
Lumber quantity per unit (crates)
Needed for L truss prodction
Total Lumber needed for production (crates)
Add: Desired ending inventory
Total Lumber needs
Less: Expected beginning inventory
Lumber to be purchased
Price per Lumber crate
Cost of Lumber to be purchased
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Yea
Raw-material purchases:
Cash payments for purchased during
the cu
ent quarter†
Cash payments for purchased during
the preceding quarter**
Total cash pmts. For raw-material purchases
† 80% of cu
ent quarter’s purchases
**20% of previous quarter’s purchases
5. Direct labor budget
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Yea
Direct labor:
Total trusses produced (S and L)
Direct-labor hours per truss
Direct-labor hours to be used
Rate per direct-labor hou
Total cash payments for direct labo
6. Overhead budget
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Yea
Production overhead:
Indirect material
Indirect labor
Other
Depreciation
Total overhead
Less: Non-cash depreciation
Total cash payments for production overhead
7. Summary cash budget
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Yea
Cash balance, beginning of period
Proceeds from bank loan (1/2/x1)
Cash receipts
Total cash available
Disbursements:
Direct materials
Direct labo
Overhead
Selling and administration expenses
Dividends
Purchase of equipment
Quarterly installment on loan principal
Quarterly interest payment
Total disbursements
Cash balance, end of period
8. Budgeted scheudule of costs of good manufactured sold for the year 20x1
Amazing Building Company
Budgeted Schedule of Cost of Goods Manufactured and Sold
For the Year Ended December 31, 20x1
Direct material:
Raw-material inventory, 1/1/x1
Add: Direct materials purchased
Raw material available for use
Deduct: Raw-material inventory, 12/31/x1
Raw material used
Direct labor
Manufacturing overhead:
Indirect material
Indirect labor
Other overhead
Depreciation
Total manufacturing overhead
Budgeting ove
underapplied overhead
Overhead applied to work-in-progress*
Cost of goods manufactured
Add: Finished-goods inventory, 1/1/x1
Cost of goods available for sale
Deduct: Finished-goods inventory, 12/31/x1
Cost of goods sold
9. Budgeted income statement for 20x1
Amazing Building Company
Budgeted Income Statement
For the Year Ended December 31, 20x1
Sales revenue
Less: Cost of goods sold
Gross margin
Selling and administrative expenses
Interest expense
Net income
10. Budgeted statement of retained earnings for 20x1
Amazing Building Company
Budgeted Statement of Retained Earnings
For the Year Ended December 31, 20x1
Retained earnings, 12/31/x0
Add: Net income
Deduct: Dividends
Retained earnings, 12/31/x1
11. Budgeted balance sheet sa of December 31, 20x1
Amazing Building Company
Budgeted Balance Sheet
December 31, 20x1
Cash
Accounts receivable*
Inventory:
Raw material†
Finished goods
Plant and equipment (net of accumulated depreciation)**
Total assets
Accounts payable††
Common stock
Retained earnings
Total liabilities and stockholders' equity