Chapter 15, Problem 10E

Shorts Manufacturing, Inc., has implemented lean manufacturing in its Kansas City plant as a pilot program. One of its value streams produces a family of small electric tools. The value-stream team managers were quite excited about the results, as some of their efforts to eliminate waste were proving to be effective. During the most recent three weeks, the following data pertaining to the electric tool value stream were collected:

Week 1:

Demand = 90 units @ $40

Beginning inventory = 10 units @ $20 ($5 materials and $15 conversion)

Production = 90 units using $450 of material and $1,350 of conversion cost

Week 2:

Demand = 100 units @ $40

Beginning inventory = 10 units @ $20 ($5 materials and $15 conversion)

Production = 90 units using $450 of material and $1,350 of conversion cost

Week 3:

Demand = 90 units @ $40

Beginning inventory = 0

Production = 100 units using $500 of material and $1,500 of conversion cost

Required:

1. 1. Prepare a traditional income statement for each week.
2. 2. Calculate the average value-stream product cost for each week. What does this cost signal, if anything?
3. 3. Prepare a value-stream income statement for each week. Assume that any increase in inventory is valued at average cost. Comment on the financial performance of the value stream and its relationship to traditional income measurement.