Morrison Company carefully records its costs because it basesprices on the cost

Question

Morrison Company carefully records its costs because it basesprices on the cost of the goods it manufactures. Morrisonalso carefully records its machine usage and other operationalinformation. Manufacturing costs are computed monthly, andprices for the next month are determined by adding a 20% markup toeach product's manufacturing costs. The support activity costdriver rate is based on machine hours, shown below.

Month                                           Actual Machine Hours
January                                          1,350
February                                         1,400
March                                             1,500
April                                                1,450
May                                                 1,450
June                                                  1,400
July                                                    1,400
August                                              1,400
September                                         1,500
October                                             1,600
November                                           1,600
December                                            1,600

Profits have been acceptable until the past year, but Morrison hasrecently faced increased competition. The marketing managerreported that Morrison's sales force finds the company's pricingpuzzling. When demand is high, the company's prices are low,and when demand is low, the company's prices are high. Practical capacity is 1,500 machine hours per month. Practical capacity is exceeded in some months by operating themachines overtime beyond regular shift hours. Monthlymachine-related costs, all fixed, are 70,000 per month.

a. Compute the monthly support cost driver rates thatMorrison used last year.

b. Suggest a better approach to developing cost driver ratesfor Morrison and explain why your method is better.

Explanation / Answer

Month

Actual Machine Hours

Monthly Support Cost

1,350

$51.85

1,400

$50.00

1,500

$46.67

1,450

$48.28

1,450

$48.28

1,400

$50.00

1,400

$50.00

1,400

$50.00

1,500

$46.67

1,600

$43.75

1,600

$43.75

1,600

$43.75

17,650

Month

Actual Machine Hours

Monthly Support Cost

January

1,350

$51.85

February

1,400

$50.00

March

1,500

$46.67

April

1,450

$48.28

May

1,450

$48.28

June

1,400

$50.00

July

1,400

$50.00

August

1,400

$50.00

September

1,500

$46.67

October

1,600

$43.75

November

1,600

$43.75

December

1,600

$43.75

Total

17,650

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