Kimmel Gnomes
DATE:March 1, 2018
TO:CCSU Consulting
FROM:Candice Kimmel, President, Kimmel Gnomes
SUBJECT:Master Budget for the fiscal year July 1, 2018 – June
30, 2019
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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. Sales budget
2. Production budget.
3. NA Not Required
4. Direct labor 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.
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. 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. 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. 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 2018-17 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 FirstSecond ThirdFourth
Gnome sales44,00082,00042,00076,000
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/uncollectibles.
Due to higher than expected demand this year, the Large Gnome
Division expects to have no finished gnomes in inventory on July 1,
2018 (i.e. Beginning Finished Goods Inventory is 0 Units, 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 (i.e. Finished Goods
Inventory Ending).
Quarter FirstSecond ThirdFourth
Ending FG inventory in Gnomes
as a % of the next quarter’s
budgeted sales26%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 (This is
beginning Direct Material Inventory).
, 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 (This is ending Direct Material
Inventory)..
Quarter FirstSecond ThirdFourth
Ending DM inventory as a %
of the next quarter’s
production requirement35%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 note payable. No interest payable will
accrue on the equipment note payable 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 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). The 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
$25,000 each 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