Case 4B-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. Department Total Labor Hours Square Feet of Space Occupied Number of Direct Labor- Employees Machine-Hours Hours Personnel 16,600 12,200 30 Custodial Services 8,200 3,100 47 Maintenance 14,200 11,000 65 Printing 30,500 40,600 102 161,000 13,000 Binding 100,000 20,300 307 40,000 72,000 169,500 87,200 551 201,000 85,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 330,000 65,600 93,600 415,000 161,000 $1,065,200 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-Hours Printing Department Binding Department Total hours Machine-Hours 2,200 1,200 500 2,700 13,800 15,000 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. Req 1 Req 2 Req 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 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate Personnel Custodial Services Maintenance Printing Binding 330,000 $ 65,600 $ 93,600 $ 415,000 $ 161,000 (330,000) < Req 1 0 65,600 93,600 415,000 161,000 Req 2 > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 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.) Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate Personnel Custodial Services Maintenance S 330,000 $ 65,600 $ Printing 93,600 $ 415,000 $ Binding 161,000 330,000 65,600 93,600 415,000 161,000 < Req 1 Req 3A > Show less Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A 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 Step-down method Direct method Total Overhead Cost < Req 2 Req 3A >