Allocating Fixed Costs and Budgeting

PART ONE

How can activity based management and activity based costing (ABC) benefit an organization? Specifically, address the following points.

· How does ABC differ from other allocation methods?

· Describe the main characteristics of ABC.

· What type of companies tends to benefit from ABC?

· Comment on a company (research Internet) that has implemented ABC.

· What type of company is it?

· Was it successful?

Part TWO

Answer the following questions.

· What are the general benefits of preparing the budget?

· Discuss how the budget is likely to be used for the control function.

· Variance analysis is a traditional tool used for planning and control. Comment on advantages and disadvantages of using this approach for performance evaluations.

· Do you have any suggestions for complementary or alternative performance measures?

The submission should be 3 pages total for answering Part one & two and need to include answers to all the questions listed above. Include AT LEAST 3 references in APA format.

PART THREE

PART 3 has two sections

Section one

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	$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, 2015
	A	B	Total
Sales	$960,000	$1,080,000	$2,040,000
Variable costs:
Direct material	560,000	240,000	800,000

Section two

Differential analysis involves knowing which costs are relevant, i.e. future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.

Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.

· Make a list of the expenses and amounts that are relevant for this decision.

· How much with the sale of this product contribute to the profitability of Herrestad?

· What if the company only pays $140 per unit?

· How does this change the contribution towards profitability?

· If you were the manager, would you accept this order?

· What considerations, other than financial would enter into your decision?

· The submission should only be 2 pages total for answering Part three (section one and two) above and Include AT LEAST 3 references in APA format.