For years, Daytona Parts Company has used an actual plantwide overhead rate and based its prices on cost plus a markup of 25 percent. Recently the marketing manager, Jan Arton, and the production manager, Sue Yount, confronted the controller with a common problem. The marketing manager expressed a concern that Daytona's prices seem to vary widely throughout the year. According to Arton, "It seems irrational to charge higher prices when business is bad and lower prices when business is good. While we get a lot of business during high-volume months because we charge less than our competitors, it is a waste of time to even call on customers during low-volume months because we are raising prices while our competitors are lowering them." Yount also believed that it was "folly to be so pushed that we have to pay overtime in some months and then lay employees off in others." She commented, "While there are natural variations in customer demad, the accounting system seems to amplify this variation."
Required
a. Evaluate the arguments presented by Arton and Yount. What suggestions do you have for improving the accounting and pricing procedures?
b, Assume that the Daytona Parts Company had the following total manufacturing overhead costs and direct labor hours in 2010 and 2011:
2010
Total Manufacturing overhead ..... $200,000
Direct labor hours .... 20,000
2011
Total manufacturing overhead ..... $237,500
Direct labor hours .... 27,500
Use the high-low method to develop a cost estimating equation for total manufacturing overhead.
c. Develop a predetermined rate for 2012, assuming 25,000 direct labor hours are budgeted for 2012.
d. Assume that the actual level of activity in 2012 was 30,000 direct labor house and that the total 2012 manufacturing overhead was $250,000. Determine the underapplied or overlapped manufacturing overhead at the end of 2012.
e. Describe two ways of handling an underapplied or overapplied manufacturing overhead at the end of the year.