Johnson Company bases the selling price of its manufactured product on the cost to manufacture the product. It uses the prior months cost plus a 30% markup as the selling price. It has fixed costs of $80,000 per month and uses a cost driver rate based upon machine hours. The practical capacity of the machines is 2,000 hours per month. This capacity can be exceeded in months when product demand is high and the company operates extra shifts. Below is sample of machine hours by month.

Month Actual Machine Hours

January 1600

February 1500

March 2000

October 2000

November 2200

December 2200

The marketing manager has expressed concern to the controller about selling price fluctuations and the need to stabilize prices in the face of increasing competition. Some months the price is high while in others the price is low.

Compute the monthly overhead cost driver rates for the six months provided above.

Explain to the marketing manager why the product price fluctuates.

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