Case 4B-7 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 (For each service department, use the allocation base that provides the best measure of service provided, as discussed in the chapter.)

Department	Total Labor-Hours	Square Feet of Space Occupied	Number of Employees	Machine- Hours	Direct Labor- Hours
Personnel	16,600	12,200	21
Custodial Services	8,400	3,500	48
Maintenance	14,200	10,700	68
Printing	30,800	40,000	109	163,000	12,000
Binding	104,000	21,000	301	44,000	74,000
	174,000	87,400	547	207,000	86,000

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

Personnel	$	310,000
Custodial Services		65,200
Maintenance		93,800
Printing		416,000
Binding		160,000
Total budgeted cost	$	1,045,000

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 for the current year using 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 your answers to the nearest dollar amount.)

2.	Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in the 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 your answers to the nearest dollar amount.)

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	2,600	1,200
Binding Department	500	13,100
Total hours	3,100	14,300

a.	Determine the amount of overhead that would be assigned to the job if the company uses the overhead rates developed in (1) step-down method and (2) direct method. (Round your intermediate calculation to 2 decimal places and round your answers to the nearest dollar amount.)