48 and 11(1) Saved Help Case 4B-6 (Algo) Step-Down Method versus Direct Method (L04-10, LO4-11) "This is really an odd situation," said Jim Carter, general manager of Highland Publishing Company. "We get most of the jobs we bid on that require a lot of press time in the Printing Department, yet profits on those jobs are never as high as they ought to be. On the other hand, we lose most of the jobs we bid on that require a lot of time in the Binding Department. I would be inclined to think that the problem is with our overhead rates, but we're already computing separate overhead rates for each department. So what else could be wrong?" Highland Publishing Company is a large organization that offers a variety of printing and binding work. The Printing and Binding departments are supported by three service departments. The costs of these service departments are allocated to other departments in the order listed below. The Personnel cost is allocated based on number of employees. The custodial Services cost is allocated based on square feet of space occupied and the Maintenance cost is allocated based on machine-hours. Machine- Hours Direct Labor- Hours Department Personnel Custodial Services Maintenance Printing Binding Total Labor- Square Feet of Hours Space Occupied 16,500 12,600 8,100 3,200 14,600 10,100 30, 600 40, 100 102,000 20,900 171,800 86,900 Number of Employees 28 47 61 106 308 550 168,000 47,000 215,000 14,000 71,000 85,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 320,000 65,500 93,300 418,000 165,000 $1,061,800 Prev 1 of 3 Next > 48 and 11(1) A Saved Help s Duuyeveu veneau LUDISHI VOLITVEPOFTERIUI WHIC LUI en year QIDIUMIT LEIV. Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 320,000 65,500 93,300 418,000 165,000 $1,061,800 Because of its simplicity, the company has always used the direct method to allocate service department costs to the two operating departments. Required: 1. Using the step-down method, allocate the service department costs to the consuming departments. Then compute predetermined overhead rates in the two operating departments. Use machine-hours as the allocation base in the Printing Department and direct labor-hours as the allocation base in the Binding Department 2. Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in the Printing and Binding departments. 3. Assume that during the current year the company bids on a job that requires machine and labor time as follows: Printing Department Binding Department Total hours Machine-Hours 2,400 600 3,000 Direct Labor-Hours 1,100 13,400 14,500 a. Determine the amount of overhead cost that would be assigned to the job if the company used the overhead rates developed in (1) above. Then determine the amount of overhead cost that would be assigned to the job if the company used the overhead rates developed in (2) above. Complete this question by entering your answers in the tabs below. Prev 1 of 3 !!! Next