Case 48-6 (Algo) Step-Down Method versus Direct Method (L04-10, LO4-11) 40 63 "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. Square Feet Total Labor- of Space Number of Machine- Direct Labor- Department Hours Occupied Employees Hours Hours Personnel 16,500 12,300 30 Custodial Services 8,103 3,400 Maintenance 14,000 10, 100 Printing 30,200 41,000 105 165,000 18,000 Binding 109,000 20,600 304 43,000 73,000 177,800 87,400 542 208,080 91,000 Budgeted overhead costs in each department for the current year are shown below: Personnel $ 330,000 Custodial Services 65,200 Maintenance 93,500 Printing 415,800 Binding 170,000 Total budgeted cost $ 1,073, 780 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: Direct Labor- Machine-Hours Printing Department 2,100 1,300 Binding Department 780 13,600 Total hours 14,988 Hours 2,800 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. 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: Direct Labor- Machine-Hours Hours Printing Department 2,100 1,300 Binding Department 13,600 Total hours 2,800 14,900 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. 700 Reg 1 Reg 2 Reg 3A 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. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round "Predetermined overhead rate" to 2 decimal places and rest of the answers to the nearest whole dollar amount.) Show less Personnel Custodial Services Maintenance Printing Binding Departmental costs before allocations $ 330,000 $ 65.2005 93,500 $ 415,000 $ 170,000 Allocations: Personnel costs (330,000) Custodial services costs Maintenance costs Total costs after allocations 65,200 93,500 415,000 170,000 Predetermined overhead rate 0 CB Reg 2 > 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: Direct Labor- Machine-Hours Hours Printing Department 2,100 1,300 Binding Department 13,600 Total hours 2,880 14,980 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. 700 Reg 1 Reg 2 Reg 3A Repeat requirement 1 above, this time using the direct method. Again compute predetermined overhead rates in the Printing and Binding departments. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round "Predetermined overhead rate" to 2 decimal places and rest of the answers to the nearest whole dollar amount.) Show less Personnel Custodial Maintenance Printing Binding Services $ 330,000 $ 85,200 $ 93,500 $ 415,000 $ 170,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rato 330,000 65,200 3,500 415,000 170,000