Chapter 18, Problem 60P

1.

To determine

Calculate the effect of change in inventory on the value stream profits of DVD and TV and replace the controllable margin.

Explanation of Solution

Calculate the effect of change in inventory on the value stream profits of DVD and TV and replace the controllable margin.

Particulars		DVD Group		TV Group
Beginning inventory		200		700
Price		$55		$46
Sold		$13,500		$15,600
Actual production		14,000		15,000
Budgeted production		14,000		15,000
Ending inventory		700 (1)		100 (2)
Particulars	DVD group ($)		TV group ($)		Total
Unit variable cost
Manufacturing	30		16
Selling and administrative	5		5
Traceable fixed cost
Manufacturing	140,000		258,000		398,000
Selling and administrative	10,000		10,000		20,000
Non traceable fixed cost
Manufacturing					130,000
Selling and administrative					85,000
Change in inventory	5,000 (1.1)		(10,320) (2.1)

Table (1)

Therefore, the ending inventory is 700 units for DVD group and 100 units for TV group respectively.

Therefore, the value stream profit of TVs is $236,680.

Working notes:

1) Calculate the ending inventory of DVD group:

$\begin{array}{c}\left(\begin{array}{l}\text{Ending inventory }\\ \text{of DVD group}\end{array}\right)=\left(\text{Opening inventory}+\text{Production}-\text{Sold}\right)\\ =\left(200+14,000-13,500\right)\\ =700\end{array}$

2) Calculate the ending inventory of TV group:

$\begin{array}{c}\left(\begin{array}{l}\text{Ending inventory }\\ \text{of DVD group}\end{array}\right)=\left(\text{Opening inventory}+\text{Production}-\text{Sold}\right)\\ =\left(700+15,000-15,600\right)\\ =100\end{array}$

1.1) Calculate the change in inventory of DVD and TV group:

For DVDs

$\begin{array}{c}\left(\begin{array}{l}\text{Change in inventory}\\ \text{ of DVD group}\end{array}\right)=\left(\text{Increase in inventory}\times \text{Fixed overhead/unit}\right)\\ =\left(500\times \$10\right)\\ =\$5,000\\ \end{array}$

2.1) For TVs

$\begin{array}{c}\left(\begin{array}{l}\text{Change in inventory}\\ \text{ of TV group}\end{array}\right)=\left(\text{Decrease in inventory}\times \text{Fixed overhead/unit}\right)\\ =\left(600\times \$17.20\right)\\ =\$10,320\end{array}$

2) Calculate the sales for DVDs:

$\begin{array}{c}\text{Sales}=\left(\text{Units sold}\times \text{Selling price}\right)\\ =\left(13,500\times \$55\right)\\ =\$742,500\end{array}$

3) Calculate the sales for TVs

$\begin{array}{c}\text{Sales}=\left(\text{Units sold}\times \text{Selling price}\right)\\ =\left(15,600\times \$46\right)\\ =\$717,600\end{array}$

4) Calculate the beginning inventory for DVDs:

$\begin{array}{c}\left(\begin{array}{l}\text{Beginning inventory }\\ \text{for DVDs}\end{array}\right)=\left(\text{Beginning inventory}\times \text{Manufacturing variable cost}\right)\\ =\left(200\times \$30\right)\\ =\$6,000\end{array}$

5) Calculate the beginning inventory for TVs:

$\begin{array}{c}\left(\begin{array}{l}\text{Beginning inventory }\\ \text{for TVs}\end{array}\right)=\left(\text{Beginning inventory}\times \text{Manufacturing variable cost}\right)\\ =\left(700\times \$16\right)\\ =\$11,200\end{array}$

6) Calculate the cost of goods produced for DVDs:

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of goods }\\ \text{produced of DVDs}\end{array}\right)=\left(\text{Actual production}\times \text{Manufacturing variable cost}\right)\\ =\left(14,000\times \$30\right)\\ =\$420,000\end{array}$

7) Calculate the cost of goods produced for TVs:

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of goods }\\ \text{produced of TVs}\end{array}\right)=\left(\text{Actual production}\times \text{Manufacturing variable cost}\right)\\ =\left(15,000\times \$16\right)\\ =\$240,000\end{array}$

8) Calculate the ending inventory for DVDs:

$\begin{array}{c}\text{Ending inventory}=\left(\text{Ending inventory}\times \text{Manufacturing variable cost}\right)\\ =\left(700\times \$30\right)\\ =\$21,000\end{array}$

9) Calculate the ending inventory for TVs

$\begin{array}{c}\text{Ending inventory}=\left(\text{Ending inventory}\times \text{Manufacturing variable cost}\right)\\ =\left(100\times \$16\right)\\ =\$1,600\end{array}$

2.

To determine

Provide information on the results obtained from the value stream income statement.

Explanation of Solution

The value stream income statement is prepared with the full costing income statement. The value of change in inventory has increased by $5,000 for the DVDs and decreased by $10,320 for the TVs. Non traceable fixed cost  are not allocated but are subtracted from the profits to get an operating income of $21,680.

The income statement show that both are profitable but the TVs are relatively less when compared to DVDs, the reason is that there is a negative change in the value of inventory that is $10,320 while DVDs have an increase of $5,000.

3.

To determine

Describe the benefits of using value stream for evaluating profits.

Explanation of Solution

The value stream income statement comprises of both variable and full costing income statement, which shows the effect of change in inventory. This provides the management the additional information for more complete and informative evaluation of products.