Reference no: EM13876139

Value Streams and Profit Centers Johnson Company is a manufacturer of very inexpensive DVD players and television sets. The company uses recycled parts and a highly structured manufacturing process to keep costs low so that it can sell at very low prices. The company uses lean account- ing procedures to help keep costs low and to examine financial performance. Johnson uses value streams to study the profitability of its two main product groups, DVD players and TVs. Information about finished goods inventory, sales, production, and average sales price follows.

Units	DVD Group	TV Group
Beginning inventory	400	800
Price	$     65	$     45
Sold	10,500	15,500
Budgeted and Actual production	12,000	15,000

Johnson's costs for the current quarter are as follows. Note that some of the company's manu- facturing and selling costs are traceable directly to the two value streams, while other costs are not traceable. Johnson considers all fixed costs to be controllable by the manager of each group. Also, Johnson's value stream shows operating income determined by the full cost method; the difference from the traditional full cost income statement is that the effect on income from a change in inven- tory is shown as a separate item on the value stream income statement.

Unit variable costs	DVD Group	TV Group	Total
Manufacturing	$ 28	$ 16
Selling and administrative	5	3
Traceable fixed costs Manufacturing	120,000	240,000	$ 360,000
Selling and administrative	10,000	10,000	20,000
Non-traceable fixed costs Manufacturing		130,000
Selling and administrative		80,000

Required

1. Consider Johnson's two value streams as profit centers and use the contribution income statement as a guide to develop a value stream income statement for the company. In your solution, replace the term controllable margin with value-stream income. Be sure to include the inventory effect on profit as a separate line item in your value stream income statement.

2. Interpret the findings of the analysis you completed in part 1.

3. What is the benefit of the use of value streams for evaluating profit centers relative to the use of the contribution income statement for individual product lines?