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 were 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 Employees	Machine-Hours	Direct Labor-Hours
Personnel	16,100	12,700	24
Custodial Services	9,000	3,400	50
Maintenance	14,800	10,900	65
Printing	30,900	40,300	101	163,000	18,000
Binding	102,000	20,200	302	44,000	79,000
	172,800	87,500	542	207,000	97,000

Budgeted overhead costs in each department for the current year are shown below:

Personnel	$	340,000
Custodial Services		65,700
Maintenance		93,900
Printing		412,000
Binding		165,000
Total budgeted cost	$	1,076,600

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:

	Machine-Hours	Direct Labor-Hours
Printing Department	2,300	1,300
Binding Department	500	13,800
Total hours	2,800	15,100

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.