Case 48-6 (Algo) Step-Down Method versus Direct Method [LO4-10, 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 16,100 12,300 8,100 3,300 14,000 10,000 30,900 40,800 105,000 20,000 174,100 86,400 Number of Employees 30 42 67 106 309 554 167,000 50,000 217,000 18,000 78,000 96,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 350,000 65,300 93,300 412,000 167,000 $1,087,600 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 2,900 600 3,500 Direct Labor-Hours 1,400 13,800 15,200 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. Reg 1 Reg 2 Req 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 Custodial Personnel Maintenance Printing Services Binding $ 350,000 $ 65,300 $ 93,300 $ 412,000 $ 167,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 350,000 65,300 93,300 412,000 167,000 Reg 1 Reg 2 Req 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 350,000 $ 65,300 $ 93,300 $ 412,000 $ 167,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 350,000 65,300 93,300 412,000 167,000 Reg 1 Reg 2 Reg Determine the amount of overhead cost that would be assigned to the job if the company used the overhead rates developed in requirement 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 requirement 2. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.) Show less Total Overhead Cost Step-down method Direct method Problem 11-22 (Algo) Service Department Charges [LO11-4] Sharp Motor Company has two operating divisionsan Auto Division and a Truck Division. The company has a cafeteria that serves the employees of both divisions. The costs of operating the cafeteria are budgeted at $81,000 per month plus $0.70 per meal served. The company pays all the cost of the meals. The fixed costs of the cafeteria are determined by peak-period requirements. The Auto Division is responsible for 56% of the peak- period requirements, and the Truck Division is responsible for the other 44%. For June, the Auto Division estimated it would need 94,000 meals served, and the Truck Division estimated it would need 64,000 meals served. However, due to unexpected layoffs of employees during the month, only 64,000 meals were served to the Auto Division. Another 64,000 meals were served to the Truck Division as planned. The cafeteria's actual fixed costs for June totaled $86,000 and its actual meal costs totaled $104,600. Required: 1. How much cafeteria cost should be charged to each division June? 2. Assume the company follows the practice of allocating all cafeteria costs incurred each month to the divisions in proportion to the number of meals served to each division during the month. On this basis, how much cost would be allocated to each division for June? (Round your intermediate calculations to 2 decimal places.) Auto Division Truck Division Total cost charged 2. Total cost allocated