Herrestad Company does produce and sell two products and the details below will be used to prepare a segmented income statement (showing the income for each product and the total) for the company. Use ABC to allocate all fixed costs to the two products.
Background information
Total Prod A Prod B
Beginning inventory0
Units produced 10,000 2,500 7,500
Units sold 8,000 2,000 6,000
Selling price per unit $255 480 180
Variable costs per unit
Direct material 100 280 40
Direct labor 60 60 60
Variable overhead 25 40 20
Variable selling and admin. exp. 10 13 9
Fixed costs
Fixed manufacturing overhead 200,000
Fixed selling and administrative 100,000
Production runs (not $) 100 65 35
Number of sales reps (not $) 25 15 10
Here are the first few lines of the segmented income statement to help you get started. Complete the statement in good format and make sure you allocate the fixed costs to the two products. When done, comment on the information and the relative profitability of the two products.
Herrestad Company
Segmented Income Statement
For the period ending Dec. 31, 2011
A B Total
Sales $960,000
$1,080,000 $2,040,000
Variable costs:
Direct material 560,000 240,000 800,000
The submission should be 4 pages and need to include answers to all the questions listed above. Show computations, discuss the results and include references in APA for
In module one we treated the company as if it only had one product. This is probably not a realistic assumption. Some or all of the fixed costs may be used for multiple products, so how do we much each product consumes of common (overhead) resources.
We are referring to cost of equipment, building, supervisors and other resources that cannot be specifically attributed (directly traced) to one product. If we don’t know, we have to estimate or allocated these costs to the various products to estimate the unit cost of a product. We’ll never know the exact cost, but having a reasonable estimate is useful for many types of decisions.
Control and quality are other factors related to the allocations process and we’ll examine these aspects too in this module.
Required material
Madegowda, J. (2007). Management Accounting, Global Media (read chapter 9), from Trident online library.
Martin, J.R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues – Chapter 8: Introduction. Management And Accounting Web Home Page. Retrieved from http://maaw.info/Chapter8.htm
Walther, L.M. (2010). Principles of Accounting: A Complete Online Text, chapter 19 (the section titled Modern management of costs and quality) and 20 (the section titled Activity based costing). Retrieved from http://www.principlesofaccounting.com/
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73. http://textbookequity.com/oct/Textbooks/TBQ_PA_Accounting_managerial.pdf
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