Fixed cost is a cost in business that remains unchanged regardless of the sales revenue level or the output level. In the short term, these costs do not change in the business. However, they may be altered over the long term. In both cases, they remain fixed costs despite the different characteristics. Examples of fixed costs include rent, wages and salaries, insurance among other costs. A variable cost changes with the sales revenue and output of the company. An example of variable cost includes energy usage, raw materials, distribution cost among other costs.
Allocation of fixed cost in Herrestad company is calculated as follows.
1. Fixed manufacturing overhead unit of apportionment is the number of production runs in the factory.
2. fixed selling and administrative cost are allocated using the number of sales representatives.
Fixed costs
- Manufacturing cost apportionment/allocation
Production runs in A/total runs * fixed cost
65/100*200000=130,000
- Production runs in B /total runs*fixed cost
35/100*200000=70000
15/25*100000=60000
10/25*100000=40000
HERRESTAD COMPANY
SEGMENTED INCOME STATEMENT
FOR THE PERIOD ENDING DEC,31, 2011
Source: www.accountingcoach.com/income-statement
Product A
The product has no opening stock and also no purchases were made for product A. Value of closing stock is calculated by subtracting the units sold from the number of units manufactured.(2500-2000)units*$240= $240000. Direct material costs are $560000 and direct labor of $60000 makeup the fixed cost which add up to$620000. The variable cost is made up of selling and administration cost which is $13000, variable overhead cost is at $40000. Fixed cost comprises of manufacturing cost at $130000, selling and administrative cost of $60000. The total expenses for this product are $863000, and the net profit is $337000.
Product B
The sales for the product is $ 1080000 and has opening stock and also purchases. The closing stock value is $270000 which is calculated as follows units produced few units sold which is (7500-6000)units *$180 which is $270000. Expenses are made up of direct cost that comprises of direct material and direct cost. Variable include variable selling and administration cost at $9000,the selling cost and administration cost at $40000. Net profit for this product is $911000.
Reference
Jerry J. Weygandt, P. D. (2009). Managerial Accounting: Tools for Business Decision Making. Kansas: Wiley.
