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. 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 16,900 12,300 26 Custodial Services 8,600 3,900 47 Maintenance 14,100 10,200 69 Printing 30,600 40,700 103 162,000 18,000 Binding 104,000 20,400 304 42,000 73,000 174,200 87,500 549 204,000 91,000 Budgeted overhead costs in each department for the current year are shown below: Personnel $ 350,000 Custodial Services 65,900 Maintenance 93,300 Printing 414,000 Binding 164,000 Total budgeted cost $ 1,087,200 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 1,200 Binding Department 600 13,300 Total hours 2,900 14,500 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.

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.

Personnel	Custodial Services	Maintenance	Printing	Binding
Departmental costs before allocations	$350,000	$65,900	$93,300	$414,000	$164,000
Allocation:
Personnel
Custodial services
Maintenance
Total costs after allocations
Predetermined overhead rate

Repeat requirement 1 above, this time using the direct method. Again compute predetermined overhead rates in the Printing and Binding departments.

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 above.

Total Overhead Cost
Step-down method	$
Direct method	$