Morrison Company carefully records its costs because it basesprices on the cost
ID: 2433746 • Letter: M
Question
Morrison Company carefully records its costs because it basesprices on the cost of the goods it manufactures. Morrison alsocarefully records its machine usage and other operationalinformation. Manufacturing costs are computed monthly, and pricesfor the next month are determined by adding a 20% markup to eachproduct’s manufacturing cost. The support activity costdriver rate is based on machine hours, shown below:
Month ActualMachine 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 Morrisonhas recently faced increased competition. The marketing mangerreported that Morrison’s sales forced finds thecompany’s pricing puzzling. When demand is high, thecompany’s prices are low, and when demand is low, thecompany’s prices are high. Practical capacity is 1,500machine hours per month. Practical capacity is exceeded in somemonths by operating the machines overtime beyond regular shifthours. Monthly machine-related costs, all fixed, are $70,000 permonth.
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
Computation of monthlysupport cost driver rateMonth
Actual Machine Hours
Monthly Support Cost
January1,350
$51.85
February1,400
$50.00
March1,500
$46.67
April1,450
$48.28
May1,450
$48.28
June1,400
$50.00
July1,400
$50.00
August1,400
$50.00
September1,500
$46.67
October1,600
$43.75
November1,600
$43.75
December1,600
$43.75
Total17,650
Monthly Support cost perMH = Machine RelatedCost / Number of Actual MH in themonth For example forJanuary = $70,000/1,350 = $51.85 June = $70,000/1,400 = $50.00 December = $70,000/1,600 = $43.75 Other months values have been calculated accordingly. b. Suggest a better approach to developing cost driverrates for Morrison and explain why your method is better.The support cost driverrate should be determined as the ratio of the normal cost of asupport activity accumulated in the cost pool to the normal levelof the cost driver for the activity. For Morison's machine-relatedsupport costs, the computation is: = $70,000x 12 / (1,500 machine hours x 12 months) = $840,000 / 18,000 = $46.67 per machinehour If the cost driver rateis based instead on actual or budgeted activity levels thatfluctuate over time, then support activity costs will beunderstated in periods of high demand and overstated in periods oflow demand, as shown in part (a). If Morison’s support costsare caused by multiple cost drivers, the company may develop a moreaccurate cost system by using multiple cost driverrates.
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