In: Accounting
Developing and Using a Predetermined Overhead Rate: High-Low
Cost Estimation
For years, Mattoon Components Company has used an actual plantwide
overhead rate and based its prices on cost plus a markup of 30
percent. Recently the marketing manager, Holly Adams, and the
production manager, Sue Walsh, confronted the controller with a
common problem. The marketing manager expressed a concern that
Mattoon's prices seem to vary widely throughout the year. According
to Adams, "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." Walsh 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 demand, the accounting
system seems to amplify this variation."
(b.) Assume that the Mattoon Components Company had the following total manufacturing overhead costs and direct labor hours in 2016 and 2017:
2016 | 2017 | ||
---|---|---|---|
Total manufacturing overhead | $206,000 | $252,000 | |
Direct labor hours | 20,000 | 28,000 |
Use the high-low method to develop a cost estimating equation
for total manufacturing overhead.
Total costs = $Answer
+ $Answer
X
(c.) Develop a predetermined rate for 2018, assuming 25,000
direct labor hours are budgeted for 2018.
Round answers to two decimal places.
$Answer
per direct labor hour
(d.) Assume that the actual level of activity in 2018 was 30,000
direct labor hours and that the total 2018 manufacturing overhead
was $250,000. Determine the underapplied or overapplied
manufacturing overhead at the end of 2018.
Do not use a negative sign with your answer.
$Answer
AnswerUnderappliedOverapplied