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	16,400	12,500	28
Custodial Services	8,800	3,000	49
Maintenance	14,500	10,300	69
Printing	30,500	40,400	101	168,000	10,000
Binding	104,000	20,900	303	49,000	77,000
	174,200	87,100	550	217,000	87,000

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

Personnel	$	350,000
Custodial Services		65,700
Maintenance		93,200
Printing		414,000
Binding		161,000
Total budgeted cost	$	1,083,900

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	2,800	1,100
Binding Department	500	13,500
Total hours	3,300	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 Reg 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 Personnel Custodial Services Maintenance Printing Binding $ 350,000 $ 65,700 $ 93,200 $ 414,000 $ 161,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 350,000 65,700 93,200 414,000 161,000 Reg 1 Reg 2 Reg 3 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 S 350,000 $ 65,700 $ 93,200 $ 414,000 $ 161,000 Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate 350,000 65,700 93,200 414,000 161,000 Req 1 Reg 2 Reg 3 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