3-26 Fluctuating cost driver rates, effect on markup pricing
Morrison Company carefully records its costs because it bases prices on the cost of the goods it manufacturers. Morrison also carefully records its machine usage and other operational information. Manufacturing costs are computed monthly, and prices for the next month are determined by adding a 20% markup to each product’s manufacturing costs. The support activity cost driver rate is based on machine hours, shown below:
Month:
January-1,350 actual machine hours
Feb.-1,400 machine hours
March-1,500 machine hours
April and May 1,450
June through August-1,400
Sept.-1,500
Oct.-Dec.-1,600
Profits have been acceptable until the past year, but Morrison has recently faced increased competition. The marketing manager reported that Morrison’s sales force finds the company’s pricing puzzling. 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 the machines overtime beyond regular shift hours. Monthly machine-related costs, all fixed, are $70,000 per month.
A. Compute the monthly support cost driver rates that Morrison used last year.

Monthly Support Cost per Machine Hour = $70,000 / Number of Actual Machine Hours

For January, for example. Monthly support costs = $70,000 / 1,350 = $51.85

Actual / Monthly
Machine / Support
Month / Hours /

Costs

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 Hours
/ 17,650

B. Suggest a better approach to developing cost driver rates for Morrison and explain why your method is better.

The support cost driver rate should be determined as the ratio of the normal cost of a support activity accumulated in the cost pool to the normal level of the cost driver for the activity. For Toki’s machine-related support costs, the computation is:

If the cost driver rate is based instead on actual or budgeted activity levels that fluctuate over time, then support activity costs will be understated in periods of high demand and overstated in periods of low demand, as shown in part (a). If Toki’s support costs are caused by multiple cost drivers, the company may develop a more accurate cost system by using multiple cost driver rates.

3-28 Process costs
Pitman Chemical Company manufactures and sells Goody, a product that sells for $10 per pound. The manufacturing process also yields 1 pound of a waste product, called Baddy, in the production of every 10 pounds of Goody. Disposal of the waste product costs $1 per pound. During March, the company manufactured 200,000 pounds of Goody. Total manufacturing costs were as follows:
Direct materials were $232,000
Direct labor was $120,000
Manufacturing support costs were $60,000
Total was $412,000
Required
Determine the cost per pound of Goody

Direct materials / $232,000
Direct labor / 120,000
Support costs / 60,000
Disposal costs of waste product / 20,000
Total costs / $432,000
Number of pounds of Goody / 200,000
Cost per pound of Goody / $2.16

3-29 Process costing equivalent units
The information below pertains to July production at Porter Company’s paint factory, which produces paints for household interiors:
Work in Process July 1: Gallons were 3,000, materials were 30% complete and conversion was 20% complete
Started in July was 7,000 gallons, so to account for was 10,000
Completed and transferred out were 6,000 gallons, materials were 100% complete, and conversion was 100% complete
Work process July 31st: Gallons were 4,000, materials were 25% complete, and conversion was 10% complete.
Accounted for was 10,000
Required
Using the weighted-average method, determine the number of equivalent units of production for materials and conversion during July.

Materials / Conversion
Completed gallons / 6000  100% / 6000 / 6000
Ending work-in-process gallons / 4000  25%; 4000  10% / 1000 / 400
Equivalent units of production / 7000 / 6400