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. Direct Labor- Hours Machine-Hours Department Personnel Custodial Services Maintenance Printing Binding Total Labor- Hours 16,600 8,400 14,900 30,800 105,000 175,700 Square Feet of Space Occupied 12,100 3,400 10,300 40,200 21,000 87,000 Number of Employees 26 49 66 102 306 549 167,000 43,000 210,000 12,000 79,000 91,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 340,000 65,200 93,100 416,000 169,000 $1,083,300 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 2,700 500 3,200 Direct Labor-Hours 1,400 13,200 14,600 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. 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 Personnel Custodial Maintenance Services Printing Binding $ 340,000 $ 65,200 $ 93,100 $ 416,000 $ 169,000 (340,000) Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 0 65,200 93,100 416,000 169,000 Req 1 Reg 2 Reg 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 Services Maintenance Printing Binding $ 340,000 $ 65,200 $ 93,100 $ 416,000 $ 169,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 340,000 65,200 93,100 416,000 169,000 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 Total Overhead Cost Step-down method Direct method