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. Machine- Hours Direct Labor- Hours Department Personnel Custodial Services Maintenance Printing Binding Total Labor- Hours 17,000 8,200 14,700 30,700 102,000 172,600 Square Feet of Space Occupied 12,300 3,300 10,100 40,900 20,200 86,800 Number of Employees 28 43 61 102 302 536 160,000 47,000 207,000 19,000 79,000 98,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 320,000 65,400 93,300 411,000 166,000 $1,055,700 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 2,300 600 2,900 Direct Labor-Hours 1,500 14,000 15,500 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. Req 1 Req 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 A Personnel Custodial Maintenance Printing Binding Services $ 65,400 $ 93,300 $ 411,000 $ 166,000 $ 320,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate Req 1 Req 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 Maintenance Printing Binding Custodial Personnel Services 320,000 $ 65,400 $ 93,300 $ 411,000 $ 166,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate Req 1 Req 2 Req Determine the amount of overhead cost that wo in requirement 1 above. Then determine the am the overhead rates developed in requirement 2. to the nearest whole dollar amount.) Total Overhead Cost Step-down method Direct method