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 a cost-plus a markup of 30%. 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 Mattoons 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.

a. Evaluate the arguments presented by Adams and Walsh. What suggestions do you have for improving the accounting and pricing procedures?