Case 1 Frame It Company (Chp 9)

Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his
senior staff. It was November of 20x0, and the group was discussing preparation of the firm's master
budget for 20x1. 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, Vaughn replied as follows: The robot
will cost $1,000,000. We'll finance it with a one-year $1,000,000 loan from Shark 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.
Frame-It Company is a manufacturer of metal picture frames. The firm's two product lines are
designated as S (small frames; 5 7 inches) and L (large frames; 8 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, FrameIt 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. Emily Jackson,
Frame-It's controller, is in charge of preparing the master budget for 20x1. She has gathered the
following information:
1.

2.

3.
4.

5.

6.

Sales in the fourth quarter of 20x0 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 20x1 are expected to be 55,000 units.
Frame-It'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.)
The S frame sells for $10, and the L frame sells for $15. These prices are expected to hold
constant throughout 20x1.
Frame-It'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 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.
All of Frame-It's 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.
Indirect materials are purchased as needed and paid for in cash. Work-in-process inventory is
negligible.

7.

Projected manufacturing costs in 20x1 are as follows:

8.

The predetermined overhead rate is $10 per direct-labor hour. The following manufacturing
overhead costs are budgeted for 20x1.
p. 435

All of 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
.
11
.

Jackson anticipates that dividends of $50,000 will be declared and paid in cash each quarter.
Frame-It's projected balance sheet as of December 31, 20x0, follows:

Required: Prepare Frame-It Company's master budget for 20x1 by completing the following
schedules and statements.
1.

Sales budget:

2.

Cash receipts budget:

3.

Production budget:

4.

Direct-material budget:

5.

Cash disbursements budget:

6.

Summary cash budget:

7.
8.

Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. (Hint:
In the budget, actual and applied overhead will be equal.)
Prepare Frame-It's budgeted income statement for 20x1. (Ignore income taxes.)

9.

Prepare Frame-It's budgeted statement of retained earnings for 20x1.

10
.

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

Case 2 High Street Clothes (Chp 10)

High Street Clothes is a retailer that sells to professional women. The firm leases space for
stores in upscale shopping districts, and the organizational structure consists of regions,
districts, and stores. Each region consists of two or more districts; each district consists of
three or more stores. Each store, district, and region has been established as a profit center.
At all levels, the company uses a
responsibility-accounting system focusing on information and knowledge rather than blame
and control. Each year, managers, in consultation with their supervisors, establish financial
and nonfinancial goals, and these goals are integrated into the budget. Actual performance
is measured each month.
The South Region consists of the Coastal District and the Inland District. The Coastal District
includes the Excelsior, Windsor, and Sovereign stores. The Coastal District's performance
has not been up to expectations in the past. For the month of May, the district manager has
set performance goals with the managers of the Excelsior and Windsor stores, who will
receive bonuses if certain performance measures are exceeded. The manager of the
Sovereign store decided not to participate in the bonus scheme. Since the district manager
is unsure what type of bonus will encourage better performance, the Excelsior manager will
receive a bonus based on sales in excess of budgeted sales of $570,000, while the Windsor
manager will receive a bonus based on net income in excess of budgeted net income. The
company's net income goal for each store is 12 percent of sales. The budgeted sales
revenue for the Windsor store is $530,000.
Other pertinent data for May are as follows:

Coastal District sales revenue was $1,500,000, and its cost of goods sold amounted
to $633,750.
The Coastal District spent $75,000 on advertising.
General and administrative expenses for the Coastal District amounted to $180,000.
At the Excelsior store, sales were 40 percent of Coastal District sales, while sales at
the Windsor store were 35 percent of district sales. The cost of goods sold in both
Excelsior and Windsor was 42 percent of sales.
Variable selling expenses (sales commissions) were 6 percent of sales for all stores,
districts, and regions.
Variable administrative expenses were 2.5 percent of sales for all stores, districts,
and regions.
Maintenance cost includes janitorial and repair services and is a direct cost for each
store. The store manager has complete control over this outlay. Maintenance costs
were incurred as follows: Excelsior, $7,500; Windsor, $600; and Sovereign, $4,500.
Advertising is considered a direct cost for each store and is completely under the
control of the store manager. The Excelsior store spent two-thirds of the Coastal
District total outlay for advertising, which was 10 times the amount spent in Windsor
on advertising.
Coastal District rental expense amounted to $150,000.
The rental expenses at the Excelsior store were 40 percent of the Coastal District's
total, while the Windsor store incurred 30 percent of the district total.
District expenses were allocated to the stores based on sales.
South Region general and administrative expenses of $165,000 were allocated to the
Coastal District. These expenses were, in turn, allocated equally to the district's three
stores.

Required:
1. Prepare the May segmented income statement for the Coastal District and for the
Excelsior and Windsor stores.
2. Compute the Sovereign store's net income for May.
3. Discuss the impact of the responsibility-accounting system and bonus structure on
the managers' behavior and the effect of their behavior on the financial results for the
Excelsior store and the Windsor store.
4. The assistant controller for the South Region, Jack Williams, has been a close friend
of the Excelsior store manager for over 20 years. When Williams saw the segmented
income statement [as prepared in requirement (1)], he realized that the Excelsior
store manager had really gone overboard on advertising expenditures. To make his
friend look better to the regional management, he reclassified $25,000 of the
advertising expenditures as miscellaneous expenses, and buried them in rent and
other costs. Comment on the ethical issues in the assistant controller's actions.