Question

Our controller, Richard Kimmel is negotiating with potential new Clay suppliers in Kentucky. We need the Large Gnome Division’s Master Budget for the fiscal year ended June 30, 2019 for our corporate strategic planning process, and we cannot wait for Richard’s return from Kentucky. We would like you to prepare the Large Gnome Division’s Master Budget for the fiscal year ended June 30, 2019.

The deliverables are as follows:

1. Manufacturing overhead budget.

2. Ending finished goods inventory budget calculating the expected value of the finished goods inventory as of June 30, 2019.*

3. Selling and administrative expense budget.

4. Cash budget.

All the Master Budget schedules except those marked with an asterisk for the Large Gnome Division should include a column for each quarter and a total column for the fiscal year. We only need annual totals for the budgeted financial statements (schedules 9 and 10) and we only need a year-end total for the value of finished goods inventory (schedule 6).

The hard copies of these budget schedules should be delivered by the company deadline. You can print more than one schedule per page, but do not have a page break in the middle of a budget schedule. I like to be able to view an entire budget schedule without flipping back and forth between pages. Please also use a type font of between 10-12 points for printing. We also need you to submit (via e-mail) the Excel spreadsheet that you used to create the budget schedules you print so we can use the spreadsheet as a starting point for future budgets. Upload the Excel spreadsheet on Blackboard. We need that spreadsheet file the night before the meeting

I’ve attached a brief description of the Large Gnome Division to the budget data Richard gave me before he left for Kentucky. We eagerly await your results.

Sincerely, Candice Kimmel

The garden gnomes were first produced in volume made in the German town of Graefenroda by Phillip Griebel back in the mid-1800s. Garden gnomes quickly became popular, and their use as a garden ornament spread from Germany into France and England. With the spreading popularity of garden gnomes, numerous gnome manufacturers sprang up throughout Germany, with each manufacturer developing their own particular style and design.i

Traditional gnomes were made from terracotta clay slurry poured into molds. The gnome is removed from the mold, allowed to dry, and then fired in a kiln until it is hard. Once cooled, the gnome is painted to the level of detail desired.ii German manufacturers disappeared during WWII. Post World War II, gnome production moved to lower cost countries and lower cost processes and materials were used. Most modern gnomes are made from plastic resins using injection molds rather than terracotta.iii Griebel's descendants are the last remaining German producers, and they are last producers making the traditional terracotta garden gnomes.

Kimmel Gnomes, located in South Dakota, may be the only other manufacturer of high quality clay garden gnomes that are hand finished.v Kimmel Gnomes are stoneware, rather than terracotta. Stoneware uses higher-quality clay than terracotta and the gnomes are fired at higher temperature, yielding a stronger, more durable gnome. The gnomes are fired inside and out and are colored with glaze before firing, rather than being painted after firing. As a result Kimmel gnomes retain their color when exposed to the elements and they are not affected by moisture or freezing. The Large Gnome Division manufactures and sells gnomes between 12 and 15 inches in length or height (the “Hedgerow Gnome” model is shown in the picture to the left). Many different styles are made, but each large gnome requires virtually the same amount of time and materials.

During 2018-19 fiscal year, the average selling price for large gnomes is expected to be $107 per gnome. The Large Gnome Division forecasts the following number gnome sales.

Quarter	First	Second	Third	Fourth
Gnome Sales	44,000	82,000	42,000	76,000

The collection pattern for Accounts Receivable is as follows:

o 75 percent of all sales are collected within the quarter in which they are sold

o 25 percent of all sales are collected in the following quarter.

o There are no bad debts/uncollectables.

Due to higher than expected demand this year, the Large Gnome Division expects to have no finished gnomes in inventory on July 1, 2018, the beginning of the first quarter of the new fiscal year. To avoid having that problem in the coming fiscal year, the Large Gnome Division would like to have the ending inventory of Gnomes at the end of each of the first three quarters equal to 26% of the budgeted sales for the next quarter. They would like to have 23,000 finished gnomes on hand on June 30, 2019.

Quarter	First	Secon	Third	Fourth
Ending FG inventory in Gnomes as a % of the next quarter’s budgeted sales	26%	26%	26%	?
Ending FG inventory in Gnomes	?	?	?	23,000

Each large gnome requires an average of 4 pounds of clay. The Large Gnome Division buys clay for $0.90 per pound and they expect the price to remain constant throughout the year. They expect to have 70,000 pounds of clay on hand as of July 1, 2018, the beginning of the first quarter of the fiscal year. At the end of each of the first three quarters, the Large Gnome Division would like to have their direct materials inventory quantity to equal 35 percent of the amount required for the following quarter’s planned production. On June 30, 2019, the end of the fiscal year, Large Gnome Division would like to have 110,000 pounds of clay on hand

Quarter	First	Second	Third	Fourth
Ending DM inventory as a % of the next quarter’s production requirement	35%	35%	35%	?
Ending DM inventory in pounds	?	?	?	110,000

The Large Gnome Division buys its clay on account. It pays for 45% of its purchases of direct materials in the quarter in which they were purchased and 55% in the quarter after they were purchased.

Each large gnome requires 3.00 hours (180 minutes) of direct labor. Employees engaged in direct labor will be paid an estimated $15.00 per labor hour. Wages and salaries are paid on the 15th and 30th of each month.

Variable manufacturing overhead is estimated to be $11.00 per direct labor hour for the coming fiscal year. All variable manufacturing overhead expenses are paid for in the quarter incurred.

Fixed manufacturing overhead is estimated to total $330,000 each quarter, with $190,000 out of the total amount of $330,000 representing depreciation on machinery, equipment and the factory. All other fixed manufacturing overhead expenses are paid in cash in the quarter they occur. The fixed manufacturing overhead rate will be computed by dividing the year’s total fixed manufacturing overhead by the year’s budgeted direct labor hours. Round the fixed overhead rate to the nearest penny.

Variable selling and administrative expenses are estimated to be $14.00 per gnome sold. Fixed selling and administrative expenses are expected to total $90,000 each quarter, with $25,000 out of the total amount of $90,000 representing depreciation on the office space, furniture and equipment. Other than depreciation, all selling and administrative expenses are paid for in the quarter they occur.

On June 30, 2019 the Large Gnome Division plans to buy new machinery and equipment for $1,900,000. The new machinery and equipment will be acquired at the very end of the year, so it will not be used in production and sales during the coming year and it will not be depreciated until the following year. The Large Gnome Division expects to pay 15% down and finance the remaining 85% of the equipment cost with a loan. No interest payable will accrue on the equipment loan until after June 30, 2019.

The Division must maintain a minimum cash balance of $60,000. If after accounting for cash receipts and disbursements (including dividends) in the cash budget, the budgeted cash available cash falls below $60,000 in any quarter, the Division will need to borrow cash. They have arranged a line of credit with Liberty Bank, allowing it to borrow in $10,000 increments. Assume borrowing will take place at the beginning of any quarter in which the available cash would otherwise be below $60,000 so that at no time during the quarter will the cash balance fall below $60,000 (after payment of interest). If there is extra cash at the end of the quarter and there is borrowing outstanding, the division should pay down principal (also in increments of $10,000). Liberty Bank charges the Division interest at the rate of 1.0% per quarter, which must be paid at the end of each quarter.

As a fully owned subsidiary, the Large Gnome Division does not pay income taxes. All income taxes are charged to Kimmel Gnomes, the parent company. Large Gnome Division will pay dividends of $25,000each quarter to its corporate parent, Kimmel Gnomes. The dividends must be paid, even if the Large Gnome Division has to borrow on its line of credit to make the payment.

The budgeted balance sheet for the Large Gnome Division on June 30, 2018 (which is the same as the budgeted balance sheet at the beginning of business July 1, 2018) is presented below. Kimmel Gnomes owns 100% of the Capital Stock of the Large Gnome Division.

LARGE GNOME DIVISION – KIMMEL GNOMES BUDGETED BALANCE SHEET JUNE 30, 2018

Assets	LIABILITIES & EQUITY
Cash $208,000	Accounts Payable $96,000
Accounts Receivable 1,230,000	Notes Payable 0
Raw Material Inventory 63,000	Capital Stock 4,000,000
Plant and Equipment 14,500,000	Retained Earnings 11,905,000
TOTAL ASSETS $16,001,000	TTL LIAB. & SE $16,001,000

Answer 1

Sales budget 18 19 Particulars First Second Third Fourth Total 20 21 Budgeted Unit Sales Budgeted Unit price Budgeted Total Dollars 44,000 76,000 22 82,000 42,000 244,000 23 107 107 107 107 107 24 4,708,000 8,774,000 4,494,000 8,132,000 26,108,000 25 26 Schedule of expected Cash Collection 27 Particulars Fourth A/R First Second Third Total 28 Collection of Accounts Receivable 1,230,000 29 1,230,000 75% of sales collected in the same quarter 30 3,531,000 6,580,500 3,370,500 6,099,000 19,581,000 25% of sales collected in the next quarter 2,193,500 1,123,500 31 1,177,000 4,494,000 2,033,000 32 Total Cash Collection 25,305,000 2,033,000 4,761,000 7,757,500 5,564,000 7,222,500 33 34

- Production budget 35 36 Particulars First Second Third Fourth Total 37 38 Budgeted Unit Sales Add Desired Ending inventory Total Etimated Units Required 82,000 39 44,000 42,000 76,000 244,000 10,920 19,760 23,000 23,000 40 21,320 61,760 41 65,320 92,920 99,000 267,000 Less finished Goods Beginning Inventory 21,320 19,760 42 10,920 Units to be produced 71,600 43 65,320 50,840 79,240 267,000 44 45 Direct materials purchase budgets 46 47 Particulars First Second Third Fourth Total 48 49 Units to be produced 50,840 267,000 50 65,320 71,600 79,240 Per Unit 51 4 4 4 4 4 Material needed in production 1,068,000 52 261,280 286,400 203,360 316,960 Add Desired Ending inventory of raw Material Total Estimated material Required 71,176 110,936 110,000 110,000 53 100,240 54 361,520 357,576 314,296 426,960 1,178,000 55 Less Beginning Inventory of raw material 70,000 100,240 257,336 71,176 110,936 70,000 Material to be Purchased 291,520 316,024 56 243,120 1,108,000 Cost Per Pound 57 0.90 0.90 0.90 0.90 0.90 Cost of Material to be purchased 284,422 58 262,368 231,602 218,808 997,200 59

Schedule of expected Cash Payment 60 61 Particulars A/R First Second Third Fourth Total 62 Payment of Accounts Payable 96,000 63 96,000 45% of purchases paid in the same quarter 64 118,066 127,990 104.221 98,464 448,740 55% of purchases paid in the next quarter Total Cash paid 65 127,381 392,028 144,302 120,344 156,432 156,432 66 225,845 936,768 214,066 248,523 248,334 67 Direct labor budget 68 69 Particulars Fourth 70 First Second Third Total 71 Units to be produced 72 65,320 71,600 50,840 79,240 267,000 73 Labor hours required per unit of finished goods 3 3 3 3 3 Total labor hours needed 801,000 74 195,960 214,800 152,520 237,720 Labor rate per Hour 15.00 15.00 75 15.00 15.00 15.00 12,015,000 76 Total Direct Labor Cost 2,939,400 3,222,000 2,287,800 3,565,800 77

Manuacturing Overhead budget 78 79 Particulars Third Total First Second Fourth 80 81 Total direct Labor hours 195,960 214,800 152,520 237,720 82 801,000 Variable Overhead cost 11.00 83 11.00 11.00 11.00 11.00 Budgeted Variable Overhead Budgeted Fixed Overhead 2,362,800 1,677,720 84 2,155,560 2,614,920 8,811,000 330,000 85 330,000 330,000 330,000 1,320,000 2,007,720 Total Overhead 2,485,560 2,944,920 86 2,692,800 10,131,000 87 Total Overhead 2,692,800 88 2,485,560 2,007,720 2,944,920 10,131,000 Less Depreciation 190,000 2,754,920 760,000 89 190,000 190,000 190,000 Cash Paid for Overheads 90 2,295,560 2,502,800 1,817,720 9,371,000 91 - Selling and administrative expense budget 92 93 Particulars First Second Third Fourth Total 94 95 82,000 42,000 76,000 96 Units to be Sold 44,000 244,000 Variable Selling & adminstration expenses 97 14.00 14.00 14.00 14.00 14.00 Total variable expenses 1,148,000 98 616,000 588,000 1,064,000 3,416,000 Budgeted Fixed Overhead 90,000 90,000 90,000 99 90,000 360,000 Total Overhead 678,000 706,000 100 1,238,000 1,154,000 3,776,000

Total Overhead 678,000 1,154,000 3,776,000 102 706,000 1,238,000 100,000 103 Less Depreciation Cash Paid for Overheads 25,000 25,000 25,000 25,000 1,213,000 653,000 104 681,000 1,129,000 3,676,000 105 106 Cash Budget 107 Second Fourth First Third 108 Beginning Cash Balance Add;Cash Collections 208,000 63,974 109 67,651 65,086 7,757,500 7,821,474 110 4,761,000 5,564,000 7,222,500 7,287,586 Total Cash Available 111 4,969,000 5,631,651 112 Less;Cash Disbursements 248,334 Materials 225,845 113 214,066 248,523 3,222,000 114 Direct Labor 2,939,400 2,287,800 3,565,800 Manufacturing Overhead 115 2,295,560 2,502,800 1,817,720 2,754,920 Selling and Admnstrative 681,000 1,129,000 116 1,213,000 653,000 Equipment Purchase 285,000 (1900000*15%) 117 25,000 118 Dividend 25,000 25,000 25,000 12,500 119 Interest 7,200 1,700 Total Disbursements 6,155,026 120 7,223,823 5,016,565 8,009,754 Excess (deficiency) (1,186,026) 597,651 (722,168) 121 615,086 Financing; 122 Borrowing 790,000 123 1,250,000 (530,000) (550,000) 124 Repayment (550,000) Total Financing (530,000) 125 1,250,000 790,000 67,832 Ending Cash Balance 65,086 126 63,974 67,651

|. Ending finished goods inventory budget 128 129 130 Direct Material 3.60 131 45.00 Direct Labor 132 Manufacturing Overhead 133 Variable 33.00 134 Fixed 113.83 135 Total Production Cost per unit 195.43 136 137 Desired Ending inventory in Units Production cost per Unit Total Cost of finished goods Inventory 23,000 138 195.43 139 4,494,924 140 141 142