P $13-3$: Snyder Inc.

Snyder Inc. produces color monitors for personal computers. The firm makes $34-$inch monitors

with the following cost structure:

Direct materials $$220$

Direct labor $$150$

Because of the rapidly changing market for computer monitors, standard costs, overhead rates, and prices

are revised quarterly. While the direct labor component of standard cost has been relatively constant over

time, direct materials costs, especially the cost of the circuit boards, fluctuate widely. Therefore, for

pricing purposes, management reviews costs each quarter and forecasts next quarter's costs using the

current quarter's cost structure. It also uses this method for revising overhead costs each quarter.

Overhead is absorbed to products using direct labor cost. Fixed overhead is incurred fairly uniformly over

the year. The overhead rate next quarter is the actual overhead costs incurred this quarter divided by this

quarter's direct labor cost. Actual operating data for the last six quarters and for next quarter are shown.The president of the company, responding to the auditor's suggestion that Snyder set standard costs on an

annual basis, replied, "Annual budgeting is fine for more static companies like automobiles. But the

computer industry, especially peripherals, changes day by day. We have to be ahead of our competitors in

terms of changing our product price in response to cost changes. If we waited eight months to react to

cost changes, we'd be out of business."

Required:

Do you agree with the president or the auditor? Critically evaluate Snyder's costing system. What changes

would you suggest, and how would you justify them to the president?