I cant understand whats happening here, said Mike Holt, president of Severson Products Inc.

We always seem to bid too high on jobs that require a lot of labour time in the Finishing Department, and we always seem to get every job we bid on that requires a lot of machine time in the Milling Department. Yet we dont seem to be making much money on those Milling Department jobs. I wonder if the problem is in our overhead rates.

Severson Products manufactures high-quality wood products to customers specifications. Some jobs take a large amount of machine work in the Milling Department, and other jobs take a large amount of hand-finishing work in the Finishing Department. In addition to the Milling and Finishing Departments, the company has 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 most appropriate allocation base:

	Total Labour- Hours			Square Metres of Space Occupied			Number of Employees			Machine- Hours			Labour- Hours
Cafeteria		16,000			12,000			25
Custodial Services.		9,000			3,000			40
Machinery Maintenance		15,000			10,000			60
Milling		30,000			40,000			100			160,000			20,000
Finishing.		100,000			20,000			300			40,000			70,000
		170,000			85,000			525			200,000			90,000

Budgeted overhead costs in each department for the current year are as follows:

Cafeteria	$	320,000	*
Custodial Services		65,400
Machinery Maintenance		93,600
Milling		416,000
Finishing		166,000
Total budgeted cost	$	1,061,000

*This represents the amount of cost subsidized by the company.

The company has always allocated service department costs to the operating departments (Milling and Finishing) using the direct method of allocation, because of its simplicity.

Required:

1.

Allocate service department costs to operating departments by the step-down method. Then compute predetermined overhead rates in the operating departments for the current year, using machine-hours as the allocation base in the Milling Department and direct labour-hours as the allocation base in the Finishing Department. (Round "Predetermined overhead rate" answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)

2. Repeat (requirement 1) above, this time using the direct method. Again compute predetermined overhead rates in the Milling and Finishing departments. (Round "Predetermined overhead rate" answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)

3. Assume that during the current year the company bids on a job that requires machine and labour time as follows:

	Machine- Hours			Direct Labour-Hours
Milling Department		2,000			1,600
Finishing Department		800			13,000
Total hours		2,800			14,600

3-a.	Determine the amount of overhead 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 that would be assigned to the job if the company used the overhead rates developed in (requirement 2) above. (Round the predetermined overhead rates to 2 decimal places.)