ln-Class Case 4B-6 Background 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 this order: 1. Personnel (based on number of employees) 2. Custodial (based on square footage of space occupied) 3. Maintenance (based on machine hours) Because of its simplicity, the company has always used the direct method to allocate service department costs to the two operating departments. In-Class Case 4B-6 Background \"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. 50 what else could be wrong?\" In-Class Case 4B-6 Facts Total Labor Square Feet Number of Machine- Direct Labor Budgeted Department of Space Overhead Hours . Employees Hours Hours Occupied Costs Personnel 20,000 4,000 10 $360,000 Custodial 30,000 6,000 15 141,000 Maintenance 50,000 20,000 25 201,000 Printing 90,000 80,000 40 150,000 60,000 525,000 Binding 260,000 40,000 120 30,000 175,000 373,500 450,000 150,000 210 180,000 235,000 $1,600,500 ln-Class Case 4B-6 Requirements 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 Machine- Direct job that requires machine and labor time as shown at right: Hours ll_.|abor ours a) Determine the amount of overhead cost that would be assigned to the job under (1) the step-down method and (2) the direct method. b) Explain to Mr. Carter, the general manager, why the step- Total hours 16200 2900 down method provides a better basis for computing predetermined overhead rates than the direct method. Printing 15,400 900 Binding 800 2,000 In-Class Case 4B-6: Step-Down Method Personnel Custodial Maintenanc Services Printing Binding Total e Departmental costs before allocations $360,000 $141,000 $201,000 $525,000 $373,500 $1,600,500 Allocations: Personnel Costs (# Emp.) Custodial Services (SQFT) Maintenance Costs (MH) Total Costs after allocations SO SO $0 Predetermined Overhead Rate S S MH DLHln-Class Case 4B-6: Requirement #3 Preview Direct Using Step-Down Method Using Direct Method Machine- Labor- OHD OHD Hours Hours OHD Rate Applied OHD Rate Applied Printing 15,400 900 ? ? ? ? Binding 800 2,000 ? ? 7 ? Total hours 16,200 2,900 ? ? \" 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.\