Cost and budget, Cost Accounting

Frame-it Ltd is a manufacturer of metal picture frames. The firm's two product lines are designate S (small frames: 12 x18 cm) and L (large frames: 20 x 25 cm). The primary raw materials are flexit metal strips and 23 cm by 60 cm glass sheets. Each S frame requires a 2/3 metre metal strip; an L frame requires a 1 metre 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.

Frame-it is preparing the documentation to support their finance application. As Head of Finance (Budgets) you are required to prepare a Budgeted Balance Sheet for the period ending 31 December 2011. In order to allow the board to understand and explain the balance sheet predictions you are required to also provide all the supporting schedules that were needed to compile the budgeted balance sheet.

Your study of the organisations accounting system has revealed the following information.

1. Sales in the fourth quarter of 2010 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 2011 are expected to be 55,000 units.

2. Frame-it's sales history indicates that 60 per cent of all sales are on credit, with the remainder the sales in cash. The company's collection experience shows that 80 per cent of the credit sales collected during the quarter in which the sale is made, while the remaining 20 per cent is collected in the following quarter. (For simplicity, assume the company is able to collect 100 per cent 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 2011.

4. Frame-it's production manager attempts to end each quarter with enough finished goods inventory in each product line to cover 20 per cent of the following quarter's sales. In addition, an attempt is made to end each quarter with 20 per cent 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.

5. All of Frame-it's direct material purchases are made on account, and 80 per cent of each quarter's purchases are paid in cash during the same quarter as the purchase. The other 20 per cent is paid in the next quarter.

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

7. Projected manufacturing costs for each product in 2011 are as follows:

Direct material

Metal strips:

                                                                       S Frame     L Frame

 

S: 2/3 metre @ $3 per metre                                $2

L: 1 metre @ $3 per metre                                                      $3

Glass sheets:

S: 1/4 sheet @ $8 per sheet                                  2

L: 1/2 sheet @ $8 per sheet                                                     4

Direct labour

0. 1 hour @ $20                                                   2                 2

Manufacturing overhead

0. 1 direct labour hour x $ 10 per hour                     1                 1

Total manufacturing cost per unit                        $7             $10



8. The predetermined overhead rate is $10 per direct labour hour. The following manufacturing overhead costs are budgeted for 2011:

1st

2nd

3rd

4th

Entire

quarter

quarter

quarter

quarter

year

Indirect material

$10 200

$11 200

$12 200

$13 200

$46 800

Indirect labour

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 these costs will be paid in cash during the quarter incurred except for the depreciation charges.

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

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

11. Frame-it's management has made a decision to purchase an industrial robot capable of performing various steps in the manufacturing process. The equipment will be purchased for $1,000,000 on January 2, 2011. It will take most of the year to train personnel and reorganise the production process in order to gain the full benefits of the new equipment. The purchase will be financed with a one year $1,000,000 bank loan with a 10% per annum interest rate. Four equal instalment payments will be made on the last day of each quarter to pay off the loan. Interest payments will be quarterly as well.

12.    Frame-it's projected balance sheet as of December 31, 2010 follows:

Cash

$95 000

Accounts receivable

Inventory:

Raw materials

132 000

 

59 200

Finished goods

Plant and equipment

(net of accumulated depreciation)

167 000

 

8 000 000

Total assets

$8 453 200

 

Accounts payable

 

$99 400

Ordinary shares

5 000 000

Retained earnings

3 353 800

Total liabilities and shareholders' equity

$8 453 200

Posted Date: 2/22/2013 7:24:14 AM | Location : United States







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