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Allocating Fixed Costs

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Herrestad Company does produce and sell two products. Please see the attachment and use ABC to allocate all fixed costs to the two products.

Show computations, discuss the results in 2 to 4 pages. Please include answers to all the questions.

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Solution Summary

This solution shows how to allocate fixed costs to two products, and how to prepare a segmented income statement in good form.

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Allocation of Fixed Costs: Herrestad Company

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 inventory 0
Units produced 10,000 2,500 7,500
Units sold 8,000 2,000 6,000

Selling price per unit $250 460 180
Variable costs per unit
Direct material 100 280 40
Direct labor 50 50 50
Variable overhead 30 45 25
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 $920,000
$1,080,000 $2,000,000
Variable costs:
Direct material 560,000 240,000 800,000

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