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 16,700 8,300 14,500 30,400 102,000 171,900 Square Feet of Space Occupied 12,800 3,800 10,400 40,300 20,000 87,300 Number of Employees 22 47 69 100 310 548 169,000 46,000 215,000 20,000 75,000 95,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 350,000 65,300 93,700 419,000 165,000 $1,093,000 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: 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 2,600 600 3,200 Direct Labor-Hours 1,400 13,600 15,000 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. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Reg 1 Reg 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.) Show less Custodial Personnel Services Maintenance Printing Binding Departmental costs before allocations $ 350,000 $ 65,300 93,700 $ 419,000 $ 165,000 Allocations: Personnel costs (350,000) 31,274 45,913 66,539 206,274 Custodial services costs (96,574) 14,206 55,048 27,319 Maintenance costs (153,819) 35,318 118,501 Total costs after allocations 575,905 517,094 Predetermined overhead rate $ 3.41 x $ 11.24% $ 0 0 0 departments 3. Assume that during the current year the company bids on a job that requires machine and labor time as follows: Direct Machine-Hours Labor-Hours Printing Department 2,600 1,400 Binding Department 600 13,600 Total hours 3,200 15,000 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. Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Req 1 Reg 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 Personnel $ 350,000 Custodial Services $ 65,300 Binding $ 165,000 $ 93,700 $ 419,000 (350,000) Departmental costs before allocations Allocations: Personnel costs Custodial services costs Maintenance costs Total costs after allocations Predetermined overhead rate (65,300) 85,366 43,642 73,653 621,661 3.68 264,634 21,658 20,047 471,339 (93,700) 0 0 0 $ $ 6.28 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 2,600 600 3,200 Direct Labor-Hours 1,400 13,600 15,000 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. * Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Reg 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 $ 15,610 X $ 15,590 Step-down method Direct method