8GP.1 Value Stream Income Statements
8GP.1.E1
The tax services firm Bump, Set, & Spike, P.C. performs the following activities for its tax compliance service (in no particular order).
- Advertises and acquires new clients
- e-Files current clients’ tax returns
- Provides employees with an education reimbursement.
- Meets with clients to gather documentation.
- Fills out IRS tax forms.
Required
Which of these is most likely to be part of the firm’s tax compliance value stream?
Answer
The value stream typically defined as a set of activities that brings the customer from order to delivery. Advertising and activities to acquire new clients take place before the customer has placed an order. So, these activities are not part of the tax compliance value stream. Likewise, reimbursement for employee education does not directly help bring the customer from order to delivery.
That leaves (1) meeting with the client to gather documentation, (2) preparing IRS forms, and (3) e-File the clients tax returns. These three activities are involved in bringing the customer from order to delivery and are thus part of the value stream.
8GP.1.M1
A firm has recently adopted lean manufacturing. This firms value income statement has a two columns: value-stream and support. There are no corporate allocations. The firm observes three things on its value-stream income statement.
- The value stream column is profitable: $1,700,000 in revenue and 1,250,000 in costs. Last period there were $1,500,000 in revenue and $900,000 in costs.
- The firm’s support column includes $250,000 in costs. Last period support costs were $200,000
- The firm’s has a net profit (after inventory adjustment) of $550,000.
Required
Based on the lean accounting principles discussed in this chapter, how should we interpret these figures?
Answer
It is good that the value stream is profitable. But the costs are going up. This increase in value stream costs would likely be investigated as part of the firm’s continuous process improvement system.
The firm’s support costs going up is more worrying than costs going up in the value stream. Support costs are especially susceptible to being waste. The reason for the increase should be investigated, and extra scrutiny should be applied to these costs.
The last item suggests that net profit has increased after the inventory adjustment (it was 1,700k – 1,250k – 250k = 200k before the inventory adjustment, 550k after the inventory adjustment). That’s bad. The firm should be winding down inventory, which means a release of debits from the balance sheet (inventory) onto the income statement (cost of goods sold expense). If the profitability of the firm increases, that means this is flowing in the opposite direction: a buildup of debits in the inventory accounts.
This increase in inventory might be related to the increased costs elsewhere on the income statement. Overproduction might make both the value stream and support columns less efficient.
8GP.2 Backflush Costing (Direct Costing)
8GP.2.E1
Holdout, LLC uses a lean accounting system with backflush costing. The firm values inventory on a direct costing basis.
Holdout has no beginning inventory. During the month the firm incurs $10,000 of direct materials costs (purchased in two $5,000 bundles on the 10th and the 15th of the month), $13,000 of direct labor costs (paid on the 22nd of the month), $21,000 of variable overhead costs, and $10,000 of fixed overhead costs (all overhead is considered to be incurred on the last day of the month).
Required
What is the balance of the RIP account on the 14th of the month?
Answer
$0.
Backflush happens at the end of the period. Before that, all product costs are directly debited to the Cost of Goods Sold when those costs occur. Therefore on the 14th the RIP account will have been unchanged from its beginning balance of $0.
8GP.2.M1
After the end of a month, Holdout, LLC is ready to perform its backflush entry. The firm counts 15,000 total units. 14,000 of those were completed and sold, 500 of them were completed but not yet sold, and 500 of them are not yet complete. Holdout, LLC incurred the following costs this period.
- $25,000 Direct Materials
- $50,000 Direct Labor
- $35,000 Overhead (60% variable)
The firm also observes that $2,000 of raw materials are in the warehouse at the end of the period.
Required
(A) What is the backflush entry for Holdout, LLC this month? (Assume the firm uses (1) a RIP inventory account for all product costs and (2) a Finished Goods inventory account.)
(B) What is the backflush entry for Holdout, LLC this month? (This time assume the firm uses (1) a RIP inventory account for materials costs, (2) a Conversion Costs inventory account for conversion costs, and (2) a Finished Goods inventory account.)
Answer (A)
First we need to calculate a per unit cost figure: product costs / total units.
Product Costs: 25,000 DM + 50,000 DL + (35,000 * 0.6) VOH = $96,000
Total Units = 15,000 units (not need to use equivalent units, all units at any stage of completion are counted as whole units).
$96,000 / 15,000 = $6.40 cost per unit
The debit to Finished Goods will need to be $6.40/unit times the number of units completed but not sold.
$6.40 * 500 = $3,200 debit to FG
The debit to RIP is going to be, similarly, the $6.40/unit rate times the number of units in process (i.e. the “IP” in RIP), but you also have to add in the raw materials cost (i.e. the “R” in RIP).
$6.40 * 500 + $2,000 = $5,200 debit to RIP
The credit for this entry is to COGS and must equal the total debits we’ve calculated above (i.e. 3,200 + 5,200 = 8,400). The whole entry looks like this.
Dr. RIP $5,200
Dr. FG $3,200
Cr. COGS $8,400
Answer (B)
We can largely follow the procedures for Part A, but now it is useful to calculate separate rates for materials and conversion costs (not because they have different rates of completion, like in process costing, but because we will be debiting separate inventory accounts with these costs).
25,000 DM / 15,000 total units = $1.67 DM cost per unit (rounded)
(50,000 DL + (35,000 * 0.6) VOH) / 15,000 $4.73 CC cost per unit (rounded)
The debit to Finished Goods will need to be the sum of these two rates times the number of units completed but not sold.
(1.67 + 4.73) * 500 = $3,200 debit to FG
The debit to RIP is only the DM rate, $1.67/unit, times the number of units in process (i.e. the “IP” in RIP). You still have to add in the raw materials cost (i.e. the “R” in RIP).
$1.67 * 500 + $2,000 = $2,835 debit to RIP
The debit to Conversion Costs is the CC rate, $4.73/unit, times the number of units in process.
$4.73 * 500 = $2,365 debit to Conversion Costs
The credit for this entry is to COGS and must equal the total debits we’ve calculated above (i.e. 3,200 + 2,835 + 2,365 = 8,400). The whole entry looks like this.
Dr. RIP $2,835
Dr. CC $2,365
Dr. FG $3,200
Cr. COGS $8,400
8GP.3 Idle Capacity
Coming Soon!
8GP.4 Backflush Costing (Throughput Accounting)
8GP.4.E1
Holdout, LLC is considering adopting throuhgput accounting instead of direct costing for its backflush entries.
Required
Which inventory accounts would the firm likely maintain if it made this change?
Answer
Two. The firm would likely account for raw and in process materials costs in the RIP inventory account and materials costs on finished (but unsold) goods in the Finished goods inventory account. Because there is no accounting for conversion costs like DL and OH, there is no Conversion Costs inventory account.
8GP.4.M1
Holdout, LLC switches to throughput accounting for its backflush entries. The firm counts 15,000 total units. 14,000 of those were completed and sold, 500 of them were completed but not yet sold, and 500 of them are not yet complete. Holdout, LLC incurred the following costs this period.
- $25,000 Direct Materials
- $50,000 Direct Labor
- $35,000 Overhead (60% variable)
The firm also observes that $2,000 of raw materials are in the warehouse at the end of the period.
Required
(A) What is the backflush entry for Holdout, LLC this month? (The firm uses a RIP and Finished Goods inventory account)
(B) What is the balance of the COGS account after backflushing?
Answer (A)
Because the firm uses throughput accounting, only direct materials are backflushed to inventory accounts. Also, by definition, there is no Conversion Costs inventory account (since only DM is considered an inventoriable product cost).
25,000 DM cost / 15,000 total units = $1.67 DM cost per uinit rounded
The debit to RIP is this rate times the number of units in process, plus the raw materials observed at the end of the period.
1.67 * 500 + 2000 = $2,835
The debit to Finished Goods is this rate times the number of units completed but not sold.
1.67 * 500 = 835
The credit to COGS balances out the two above debits. So, the backflush journal entry looks like the below.
Dr. RIP 2,835
Dr. FG 835
Cr. COGS 3,670
Answer (B)
All product costs are debited to COGS at the time they are incurred. Under throughput accounting, only direct materials are considered product costs. Therefore, the firm debited $25,000 to COGS to account for its direct materials during the period. Then, as calculated in part A, the firm credited 3,670 to COGS.
25,000 – 3,670 = 21,330 COGS final balance.
The other costs, DL, VOH, FOH, are expensed as period costs and not included in COGS.