inventory of materials is kept on hand. For this case, you can assume all beginning and ending Table 2: Standard Cost Card for Previous Fiscal Year inventory balances are zero. Advanced Device Basic Device LLJ Satellites creates an annual standard cost card to set expectations for factory workers Direct Material and supervisors (see Table 2 for the cost card from the previous fiscal year). The company has Ounces of Plastic per Unit 6.00 9.00 Cost per Ounce of Plastic $2.40 $2.40 tried to set attainable and realistic standard costs and usages in developing these standards. As Ounces of Aluminum per Unit 2.00 0.55 seen in the standard cost card for last year (Table 2), all production units go through two Cost per Ounce of Aluminum $22.00 $22.00 production departments: Components (where the various components in each receiver are produced) and Assembly (where the receivers are assembled). Details regarding all expected per- Direct Labor DL Hours per Unit (Components) 1.00 2.00 unit manufacturing costs for the two product types are found on the standard cost card. This cost DL Hours per Unit (Assembly) 3.00 2.00 card is typically updated yearly to reflect changes in prices and production usages of resources. Total DL Hours per Unit 4.00 4.00 Jack is concerned because actual year-end income fell short of projected income for the Cost per DL Hour $14.25 $14.25 third straight year (see the actual income for the previous fiscal year in Table 3). While Manufacturing Overhead (machine hours is the chosen cost driver) reviewing these results with factory managers, the factory managers were unsurprised by the Machine Hours per Unit (Components) 2.50 0.75 lower-than-expected margins for both types of units. They described difficulties in working with Machine Hours per Unit (Assembly) 1.75 1.75 new suppliers of aluminum and plastic. The company chose to switch to new suppliers near the Total Machine Hours per Unit 1.2 2.50 beginning of the last fiscal year due to market pressures on these supplies. As such, Jack suggests Pre-Determined MOH Rate per Machine Hour $9.7 $9.75 you focus on evaluating each of these material types separately in your analyses. The company employs a just-in-time inventory system for all inventory types (raw Factory managers were also concerned that the current manufacturing standards might materials, work-in-process, and finished goods inventory). Because LLJ Satellites supplies major not reflect difficulties between the two manufacturing departments. Jack tells you of some minor satellite companies, the company can accurately predict production needs in advance. Thus, the complaints from factory workers during this past year. In efforts to approve morale and after company carries little or no balances in any inventory account. For example, the raw materials extended negotiations, the company increased the wage rate of all factory employees to $15 per manager only buys aluminum and plastic when it will be immediately used in production and no hour (from $14.25 per hour) at the beginning of the fourth quarter. This higher wage is expected to be paid in the upcoming year.Table 3: Actual Income Statement for Previous Fiscal Year Production managers also expressed skepticism about the current model to assign manufacturing overhead between the two departments. Currently, LLJ Satellites uses a single, Revenues - Advanced (Actual Sales = 360,000 units) $60,840,000 COGS - Advanced plant-wide manufacturing overhead rate to estimate overhead costs based on machine hours. This Direct Materials" $21,978,000 estimate is calculated as the actual machine hours used in production multiplied by the pre- Direct Labor $20,880,000 Actual MOH' $17,100,000 determined manufacturing overhead rate described earlier. Estimates are commonly used in Gross Margin - Advanced $882,000 businesses until actual manufacturing overhead costs are known at the end of the fiscal period. Revenues - Basic (Actual Sales = 210,000 units) $30,240,000 Then, these estimates are "trued-up" or adjusted to match actual known costs at the end of the COGS - Basic year. Managers seemed especially skeptical of the overhead costs assigned to the Assembly Direct Materials" $7,654,500 Direct Labor $12,240,900 department. They also questioned if these estimates would be accurate if production increases or Actual MOH' $6,300,000 decreases significantly. Gross Margin - Basic $4,044,600 Jack also describes other strategic decisions made during the past year to try to improve Total Gross Margin $4,926,600 profitability. Most importantly, he notes that the company changed its pricing and selling Selling Costs strategies very early in the fiscal year (after the budget was set) to jumpstart sales in the Commissions (2 percent of revenues) $1,821,600 recessionary economy. The company also eliminated one sales position, saving on the salary of Salesperson Salaries $430,000 Fixed Administrative Costs $1,655,000 this salesperson, and eliminated a management employee training program that represented a Interest $650,000 $145,000 savings in administration costs. Unfortunately, the company had an unexpected cash Pre-Tax Income (Loss) $370,000 shortage in September. Thus, the firm needed a costly emergency short-term loan that a - Direct materials costs consist of 2,160,000 ounces of plastic for the advanced units and significantly increased the interest costs for LLJ Satellites. Jack also wants your assistance in 1,890,000 ounces of plastic for the basic units; plus 810,000 ounces of aluminum for the advanced units and 157,500 for the basic units. The average price was $2.30 per ounce understanding any additional reasons why the company fell short of budgeted projections. for plastic and $21.00 for aluminum. To help you in your assessment, the accounting group at LL created a variance analysis b - Actual direct labor totaled 780,000 hours in the Electrical Components department and 1,504,200 hours in the Assembly department for the fiscal year. showing the difference between budgeted income (Table 1) and the actual income (Table 3). c - Actual machine hours totaled 1, 057,500 hours in the Electrical Components department This analysis is tabulated below (Table 4). and 1,282,500 hours in the Assembly department for the fiscal year.Table 4: Variance Analysis Total Activity Variance 1,752,625 U Looking Forward - Planning for the Next Fiscal Year On the advice of outside shareholders, Jack has agreed to change its product pricing Revenue Variances Advanced Revenue 1,800,000 strategy. Specifically, the firm is planning on charging $169 for an advanced unit and $139 for a Basic Revenue 2,100,000 basic unit. Due to a projected improvement in the overall economy, the sales team believes it can Direct Material Plastic Variances Advanced Plastic Usage sell 390,000 units of the advanced device and 330,000 units of the basic device at those prices. Basic Plastic Usage Plastic Price 405,000 Sales in this industry are cyclical, and the company expects 50 percent of the total sales to occur Total Plastic Variance 405,000 in the fourth quarter. For simplicity, assume that the remaining 50 percent of annual sales are Direct Material Aluminum Variances uniform throughout the year's first three quarters. Advanced Aluminum Usage 1,980,000 Basic Aluminum Usage 924,000 Based on the variance analysis, some changes may be needed in the standard costs used Aluminum Price 967,500 for budgeting and planning purposes. However, unless your variance or other analyses suggest Total Aluminum Variance 1,936,500 otherwise, all standard usages (e.g., ounces of plastic or aluminum per unit, machine hours per Direct Labor Variances Components DL Usage unit, and direct labor hours per unit) will remain the same as last year for the upcoming fiscal Assembly DL Usage 59,850 DL Price 571,050 year. The company has no plans to change the manufacturing process in the upcoming year Total DL Variance 630,900 substantively. An exception is that LLJ Satellites updates its standard direct materials costs (e-g., Manufacturing Overhead Variances cost of aluminum/plastic per ounce) each year to better match current prices. Jack also wants Components MOH Usage Assembly MOH Usage 2,778,750 advice on whether LLJ Satellites should continue to purchase materials from the new suppliers or MOH Price 585,000 ECC Total MOH Variance 3,363,750 go back to the old ones. Your standard material costs should reflect your recommendations. Each supplier (new and old) is quoting similar prices to those used last year. The company can "mix Other Cost Variances Commission (variable cost) 6,000 and match" suppliers if needed for the two materials. Finally, due to the labor negotiations with Fixed Salaries 30,000 Fixed Administration 145,000 factory workers last year, the average hourly pay rate will continue to be $15 per direct labor Interest (treated as a fixed cost) 100,000 hour for the upcoming fiscal year. Due to the skepticism of production managers regarding how manufacturing overhead is calculated, a recent accounting hire at LLJ Satellites has analyzed the manufacturing overheadcosts at the company. Specifically, she examined past manufacturing overhead costs in each its accounts receivable balance. All material purchases are made on account. The company production department and regressed these costs on various potential cost drivers. Jack is unsure generally pays 80 percent of its payables during the quarter of the purchase and the remainder how to best use this data. Results from this analysis are in the table below (Table 5). one quarter after the purchase. At the end of the last fiscal year, the accounts payable balance was $3,130,000. All other cash expenses are paid when incurred. Table 5: Regression Analysis of Factory MOH Costs on Potential Cost Drivers As noted earlier, LLJ Satellites had a cash shortage that resulted in unexpected interest Annual Electrical Components Department MOH Costs**# costs last year. Due to these problems, the board of directors wants to reduce as quickly as Cost Driver Regression Results (for cost driver) R- possible during the next fiscal year. The loan arrangement calls for a simple, non-compounding Machine Hours (Electrical Components) Y = 4,250,000 + 13.60(X) 0.86 interest rate of three percent per quarter. In addition, the company will not have any penalties for Direct Labor Hours (Electrical Components) Y =3,275,000 + 14.50(X) 0.32 paying any loans back early. Also, note that any additional loans must be taken at the beginning Annual Assembly Department MOH Costs**# of a quarter, and all interest and principal payments are made on the last day of each quarter. At Cost Driver Regression Results (for cost driver) the end of the previous fiscal year, the company had an outstanding loan balance of $6,200,000 Machine Hours (Assembly) Y = 1,500,000 + 2.20(X) 0.19 and a cash balance of $115,000. Ideally, to run operations, the company needs a minimum of Direct Labor Hours (Assembly) Y =1,750,000 + 2.00(X) 0.93 *** These regressions are based on annual data. The MOH costs include $1,300,000 in factory $150,000 of cash on hand at the end of every quarter. depreciation from the Electrical Components Department and $450,000 in factory depreciation from the Assembly Department. All other costs are paid in cash when incurred. Predicting the non-manufacturing costs for the upcoming fiscal year is relatively simple. Jack doesn't expect any changes in the sales persons' salaries from last year's actual amount of $430,000. The commission rate will also remain at two percent. The fixed administrative costs are also expected to remain at $1,655,000 and include $245,000 in depreciation expense for administrative equipment. Jack has also given you some information regarding cash receipts and payments. On average, 30 percent of quarterly sales are paid in cash, and the remaining are credit sales. The company collects 60 percent of credit sales in the same quarter as the sale and 40 percent during the quarter following the sale. At the end of the last fiscal year, LLJ Satellites had $14,000,000 in 10LLJ Satellites: Variance Analysis and Budgeting calculate budgeted manufacturing overhead. For example, the $12,845,625 of Budgeted MOH in Jack Childs is nervous about his company's future performance. The Childs' family owns Table 1 for the Advanced Units equals $9.75 per machine hour * 310,000 projected advanced 40% of the LLJ Satellites shares and generally controls the company's direction. Jack is units * 4.25 projected machine hours per advanced unit (information taken from Tables 1 and 2). currently the CFO and a member of the Board of Directors. However, outside shareholders are Table 1: Budgeted Income Statement for Previous Fiscal Year becoming increasingly anxious due to poor operating results over the past few years. Jack has hired you into the controller's office to provide fresh perspectives about Revenues - Advanced (Projected Sales = 310,000 units) $53,940,000 COGS - Advance operations at LLJ Satellites. For your first assignment, Jack asks you to review the last fiscal Direct Materials $18,104,000 year's financial information and create a preliminary budgeting plan for the next fiscal year. To Direct Labor $17,670,000 Budgeted MOH $12,845,625 help you complete this assignment, Jack has provided you with various financial data relating to Gross Margin - Advanced $5,320,375 the previous fiscal year and a brief synopsis of the firm's business model. Revenues - Basic (Projected Sales = 360,000 units) $48,240,000 LLJ Satellites - Company Overview COGS - Basic Direct Materials $12,132,000 LLJ Satellites makes two types of specialized transistors for satellite communication Direct Labor $20,520,000 Budgeted MOH $8,775,000 reception: an advanced and a basic device. At the beginning of each fiscal year, the company Gross Margin - Basic $6,813,000 creates a projected income statement for planning purposes. Below is the budgeted income Total Gross Margin $12,133,375 statement for the past fiscal year and standard cost information used to develop the budget. The company uses a plant-wide pre-determined manufacturing overhead rate to apply Selling Costs Commissions (2 percent of revenues) $2.043,600 manufacturing overhead to its products. Manufacturing overhead includes indirect manufacturing Salaries $460,000 costs such as plant utilities, factory depreciation, plant maintenance, and production supervisor Fixed Administrative Costs $1,800,000 Interest $550,000 salaries. In essence, manufacturing overhead costs include all factory-related costs that are not direct materials or direct labor. These costs are generally estimated using a pre-determined Pre-Tax Income $7,279,775 manufacturing overhead rate based on a chosen cost driver. Budgeted manufacturing overhead is typically calculated using the following formula: Budgeted MOH = Pre-determined MOH Rate * Budgeted Cost Driver Amount. LLJ Satellites has chosen Machine Hours for its cost driver to NRequired Write a memo directed to Jack Childs providing your insights for the LLJ Satellites. Your memo should include the following: (1) Demonstrate how the accounting team's variance analysis (Table 4) was created. First, in your report, create a flexible budget that is commonly used to assist in variance analysis. Next, clearly show how each variance in Table 4 was calculated. Finally, describe what decisions and choices may have led to LLJ's variances and suggest improvements where applicable. (2) Create schedules of applicable budgets for the next fiscal year. Please provide an updated standard cost card used in your budgets and describe your reasoning for any changes. Further, the budgets you create and report should include a sales budget, a cash collections budget, a production budget including schedules for direct materials, direct labor, and manufacturing overhead, a cash budget, and a projected income statement in the contribution margin format. Please clearly describe the assumptions and choices you make in creating these budgets