Allocating Fixed Costs Using Activity Based Costing

Activity based costing (ABC) employs a number of cost pools, which are usually organized by activity to apportion overhead costs(Cooper, 1992). This method is founded on the principle that production processes are simply different production activities put together in a systematic manner.ABC therefore groups production expenses into activities centered groups such as purchasing materials; machinery assembly and maintenance;amassing products, and supervision of end products among others (Cooper, 1992).

In this paper, I will use ABC to group Herrestad Company’s production expenses for product A and product B. I will also complete the company’s segmented income statement, showing the income for each product and the total. When done, I will comment on the information and the relative profitability of the two products.


Product A  
Units sold = 2,000  
Variable costs per unit  
Direct material= 280X 2,000= 560,000
Direct labor= 60 X 2,000=120,000
Variable overhead= 40 X 2,000= 80,000
Variable selling and admin. exp.= 13 X 2,000= 26,000
Fixed costs  
Fixed manufacturing overhead=  (65/100X100) x200, 000

=65%X 200,000=130,000

Fixed selling and administrative= (15/25X100) X 100,000

=60% X100, 000= 60,000

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