Microsoft Word - LLJ Case 2021 updated.docx 1 LLJ Satellites: Variance Analysis and Budgeting Jack Childs is nervous about his company's future performance. The Childs family own 40% of the shares of...

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Microsoft Word - LLJ Case 2021 updated.docx
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LLJ Satellites: Variance Analysis and Budgeting
Jack Childs is nervous about his company's future performance. The Childs family own
40% of the shares of LLJ Satellites, and generally has control over the direction of the company.
In fact, Jack is cu
ently the CFO and is also a member of the Board of Directors. However,
outside shareholders are becoming increasingly anxious due to poor operating results from the
past few years.
You have been hired by Jack into the controller’s office to provide some fresh
perspectives about operations at LLJ Satellites. For your first assignment, Jack asks you to
eview the financial information from the last fiscal year and to help create a budgeted plan for
the next fiscal year. To help you complete this assignment, Jack has provided you with various
financial data relating to the previous fiscal year as well as a
ief synopsis of the firm’s business
model.

LLJ Satellites – Company Overview
LLJ Satellites makes two types of specialized transistors for satellite communication
eception: an advanced and a basic device. At the beginning of each fiscal year, the company
creates a projected income statement for planning purposes. Below is the budgeted income
statement for the past fiscal year and standard cost information used to create the budget.
Cu
ently, the company uses a plant-wide predetermined manufacturing overhead rate to
apply manufacturing overhead to its products. Manufacturing overhead includes indirect
manufacturing costs such as plant utilities, factory depreciation, plant maintenance, and
production supervisor’s salaries. Basically, manufacturing overhead costs include all factory-
elated costs that are not direct materials or direct labor. These costs are generally estimated
using a predetermined manufacturing overhead rate based on a chosen cost driver. Budgeted
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manufacturing overhead is typically calculated using the following formula: Budgeted MOH =
Predetermined MOH Rate * Budgeted Cost Driver Amount. LLJ Satellites has chosen Machine
Hours for its cost driver to calculate budgeted manufacturing overhead. For example, the
$14,250,000 of Budgeted MOH in Table 1 for the Advanced Units = $9.50 per machine hour *
300,000 projected advanced units * 5 projected machine hours per advanced unit (information
taken from Tables 1 and 2).

Table 1: Budgeted Income Statement for Previous Fiscal Year
Revenues – Advanced (Projected Sales = 300,000 units) $53,940,000
COGS - Advanced
Direct Materials $18,104,000
Direct Labor $17,670,000
Budgeted MOH $12,845,625
Gross Margin - Advanced $5,320,375

Revenues – Basic (Projected Sales = 350,000 units) $48,240,000
COGS - Basic
Direct Materials $12,132,000
Direct Labor $20,520,000
Budgeted MOH $8,775,000
Gross Margin - Basic $6,813,000

Total Gross Margin $12,133,375

Selling Costs
Commissions (2 percent of revenues) $2,043,600
Salaries $460,000
Fixed Administrative Costs $1,800,000
Interest $550,000

Pre-Tax Income $7,279,775
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The company employs a just-in-time inventory system for all of its inventory types (raw
materials, work-in-process, and finished goods inventory). Because LLJ Satellites supplies major
satellite companies, the company can accurately predict production needs in advance. Thus, the
company ca
ies little or no balances in any inventory account. For example, the raw materials
manager only buys aluminum and plastic when it will be immediately used in production and no
inventory of materials is kept on hand. You can assume all beginning and ending inventory
alances are zero for this case.
Table 2: Standard Cost Card for Previous Fiscal Year
Advanced Device Basic Device
Direct Materials
Ounces of Plastic per Unit XXXXXXXXXX
Cost per Ounce of Plastic $2.40 $2.40
Ounces of Aluminum per Unit XXXXXXXXXX
Cost per Ounce of Aluminum $22.00 $22.00

Direct Labor
DL Hours per Unit (Components XXXXXXXXXX
DL Hours per Unit (Assembly XXXXXXXXXX
Total DL Hours per Unit XXXXXXXXXX
Cost per DL Hour $14.25 $14.25

Manufacturing Overhead (machine hours is the chosen cost driver)
Machine Hours per Unit (Components XXXXXXXXXX
Machine Hours per Unit (Assembly XXXXXXXXXX
Total Machine Hours per Unit XXXXXXXXXX
Pre-Determined MOH Rate per Machine Hour $9.75 $9.75
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LLJ Satellites has created a standard cost card (Table 2) to set expectations for factory
workers and supervisors. The company has tried to set attainable and realistic standard costs and
usages in developing these standards. As seen in the standard cost card (Table 2), all production
units go through two production departments: Components (where the various components in
each receiver are produced) and Assembly (where the receivers are assembled). Details
egarding all expected per-unit manufacturing costs for the two product types are found on the
standard cost card. This cost card is typically updated each year to reflect changes in prices and
production usages of resources.
Jack is concerned because actual year-end income fell short of projected income for the
third straight year (see actual income for the previous fiscal year in Table 3). While reviewing
these results with factory managers, the factory managers were unsurprised by the lower-than-
expected margins for both types of units. They described difficulties in working with new
suppliers of aluminum and plastic. The company chose new to use new suppliers mid-year due to
market pressures in these supplies. As such, Jack suggests you focus on evaluating each of these
material types separately in your analyses.
Factory managers were also concerned that the cu
ent manufacturing standards may not
eflect difficulties between the two manufacturing departments. Jack tells you of some minor
heard complaints from some workers about working in the Components department during this
past year. In efforts to approve morale and after extended negotiations, the company increased
the wage rate of all factory employees to $14.25 per hour at the beginning of the fourth quarter.
Production managers also expressed skepticism about the cu
ent model to assign
manufacturing overhead between the two departments. Cu
ently, LLJ Satellites uses a single,
plant-wide manufacturing overhead rate to estimate overhead costs based on machine hours. This
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estimate is calculated as the actual machine hours used in production multiplied by the pre-
determined manufacturing overhead rate described earlier. Estimates are commonly used in
usinesses until actual manufacturing overhead costs are known at the end of the fiscal period.
At the end of the year, these estimates are “trued-up” or adjusted to match actual known costs.
Managers seemed especially skeptical of the overhead costs assigned to the Assembly
department. They also questioned if these estimates will be accurate if production increases or
decreases significantly.
Jack also describes other strategic decisions made during the past year to try and improve
profitability. Most importantly, he notes that the company changed its pricing and selling
strategies very early in the fiscal year (after the budget was set) in an attempt to jumpstart sales
in the recessionary economy. The company also eliminated one sales position, saving on the
salary of this salesperson, and eliminated a management employee training program that
epresented a $145,000 savings in administration costs. Unfortunately, the company had an
unexpected cash shortage in September. Thus, the firm needed a costly emergency short-term
loan that significantly increased the interest costs for LLJ Satellites. Jack wants assistance
understanding other reasons why the company fell short of budgeted projections.
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Table 3: Actual Income Statement for Previous Fiscal Year

Revenues – Advanced (Actual Sales = 360,000 units) $60,840,000
COGS - Advanced
Direct Materialsa $20,952,000
Direct Labo
$20,880,000
Actual MOHc $17,100,000
Gross Margin - Advanced $1,908,000

Revenues – Basic (Actual Sales = 210,000 units) $30,240,000
COGS - Basic
Direct Materialsa $7,136,850
Direct Labo
$12,484,500
Actual MOHc $6,300,000
Gross Margin - Basic $4,318,650

Total Gross Margin $6,226,650

Selling Costs
Commissions (2 percent of revenues) $1,821,600
Salaries $430,000
Fixed Administrative Costs $1,510,000
Interest $650,000

Pre-Tax Income (Loss) $1,815,050
a – Direct materials costs consist of 2,160,000 ounces of plastic for the advanced units and
1,911,000 ounces of plastic for the basic; plus 756,000 ounces of silicon for the
advanced units and 126,000 for the basic units. The average price paid was $2.35 per
ounce for plastic and $21.00 per ounce for silicon.

– Actual direct labors totaled 780,000 hours in the Electrical Components department and
1,521,000 hours in the Assembly department for the fiscal year.

c – Actual machine hours totaled 1,200,000 hours in the Electrical Components department
and 1,140,000 hours in the Assembly department for the fiscal year.
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Looking Forward – Planning for the Next Fiscal Year
On the advice of outside shareholders, Jack has agreed to change its product pricing
strategy. Specifically, the firm is planning on charging $178 for an advanced unit and $138 for a
asic unit. Due to a projected improvement in the overall economy, the sales teams believes they
can sell 390,000 units of the advanced device and 330,000 units of the basic device at those
prices. Sales in this industry are cyclical and the company expects 50 percent of the total sales to
occur in the fourth quarter. For simplicity, assume the remaining 50 percent of annuals sales are
uniform throughout the first three quarters of the year.
Based on the variance analysis, some changes may be needed in the standard costs used
for budgeting and planning purposes. However, unless your variance or other analyses suggest
otherwise, all of the standard usages
Answered 2 days AfterApr 06, 2022

Solution

Himanshu answered on Apr 08 2022
16 Votes
Date: 08 – 04 - 2022
To: XYZ company
From: PCV company
Subject: Suggestions for Improving Business Operations
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Previously, company has done reasonably well but it could be done better if they follow and work on the following components of the business operations:
Cost
Company should focus on reducing cost since it will help in increasing net profitability. It aids in the establishment of a competitive pricing for a product or service. It aids in increasing the industry's market share. It aids in increasing profit or return. It aids in gaining a competitive edge over rivals. The decrease must be genuine in the...
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