Developing and Using a Predetermined Overhead Rate: High-Low Cost Estimation
For years, Daytona Parts Company has used an actual plant wide 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 demand, the accounting system seems to amplify the variation."
- Evaluate the arguments presented by Arton and Yount. What suggestions do you have for improving the accounting and pricing procedures?
- Assume that the Daytona Parts Company had the following total manufacturing overhead costs and direct labor hours in 2010 and 2011