Question
SpectraInc. produces color monitors for personal computers. The firm makes 19-inch monitors with the following cost structure: Direct materials$220Direct labor$150 Because of the rapidly changing
SpectraInc. produces color monitors for personal computers. The firm makes 19-inch monitors with the following cost structure:
Direct materials$220Direct 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.
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