BUDGETING

ACC202 - Managerial Accounting

MOD 5 SLP

Budgeting



ACC202 - Managerial Accounting

MOD 5 SLP Budgeting

Herrestad Company

The cost Allocation for Product C

Units produced

1000

Units sold

1000

 

 

Selling price per unit

150

Variable costs per unit:

 

Direct material

28

Direct labor

38

Variable overhead

13

Variable selling and admin. exp.

0

The Income Statement of the Herrestad Company after producing product C.

 

Product A

Product B

Product C

 

$

$

$

Sales

920,000

1,080,000

150,000

Less: Variable Costs

Direct Material

560,000

240,000

28,000

Direct Labor

100,000

300,000

38,000

Variable Overhead

90,000

15,000

13,000

Variable Selling and Admin Expenses

26,000

540,000

0

Contribution Margin

144,000

-15000

71,000

Fixed Expenses

Fixed Manufacturing Overhead

44,400

133,333

22,222

Fixed Selling Administration

2,222

6,667

11,112

Total Fixed Expenses

46,622

140,000

33,334

Net Operating Loss/Income

97,378

-155,000

37,666

Following is adjusted Income statement at the price if $140

 

Product C

 

$

Sales

140,000

Less: Variable Costs

Direct Material

28,000

Direct Labor

38,000

Variable Overhead

13,000

Variable Selling and Admin Expenses

0

Contribution Margin

61,000

Fixed Expenses

Fixed Manufacturing Overhead

22,222

Fixed Selling Administration

11,112

Total Fixed Expenses

33,334

Net Operating Loss/Income

27,666

The order for product C will be accepted because the profit margin and contribution margin are both positive for the company and despite reducing the price to 140 the company is still generating orders. The contribution is reduced because the selling price is reduced by $10 but still the product is generating profitability of the product. The company should discontinue the product B because the company is generating loss for the company and is affecting the profitability of the segment (Walther, 2010).

Other considerations

The other considerations, which will be included in the consideration when deciding to produce a certain product includes production, related considerations (Walther, 2010).

Staffing Requirements

It includes the staff requirements whether additional staff is required in order to produce additional units of product C. if the staff is required then the costs of the staff and the impact of the costs on the bottom line of the product. The costs of the additional staff must be matched with the price offered by the customer if the customer is not willing to pay more than incurring additional costs will be useless, as they will lead to deterioration of profits because additional amount cannot be charged from the customer (Walther, 2010).

Production Capability

The production capability and ...