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. Total Labor Department Hours Square Feet of Number of Space Occupied Employees Machine- Direct Labor- Boura Bours Personnel 16,300 12,000 28 Custodial Services 8,500 3,000 45 Maintenance 14,900 10,700 68 Printing Binding 30,400 40.900 101 164,000 15,000 109,000 20,100 308 49,000 73,000 179,100 86,700 550 213,000 88,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding $ 350,000 65,300 93,700 417,000 161,000 Total budgeted cost $1,087,000 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 2,600 600 3,200 1,000 13,000 14,000 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.) Maintenance Printing Binding 93,700 $ 417,000 $ 161,000 Personnel Custodial Services Departmental costs before allocations Allocations: $ 350,000 $ 65,300 $ Personnel costs Show less A