management
CASE 48-6 Step-Down M versus Direct M O "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 seps- rate 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, Square Feet Number Direct Total of Space Machine- Labor- Department Labor-Hours Occupied Employees Hours Hours Personnel ......44.+...FF# 20,000 4,000 Custodial Services ...... 30,000 6,000 Maintenance ... ... ..... 50,000 20,000 25 Printing ..... . ......... 90.000 10,000 150,000 60.000 Binding . . . . .. . .. ....... 260.000 DOO 120 30.000 175 000 450.000 150.000 210 180.000 235.000 Budgeted overhead costs in each department for the current year are shown below: Personnel.. ..... ........... Custodial Services ... ...... 360.000 Maintenance 141.000 Printing ..... 201.000 Binding . . .. . 525,000 Total budgeted cost ......... 373.500 $1.600,500 Because of its simplicity, the company has always used the direct method to allocate service department costs to the two operating departments. Scanned with CamScanner Process Costing Required: 1. Using the step-down method. allocate the service department costs to the consuming depart- ments. 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- Direct Hours Labor-Hours Printing Department . . . . . . . . . ....... 15,400 900 Binding Department . . .. . . . .. .. 800 2,000 Total hours . . .. .. . . 16,200 2,900 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. b. Explain to Mr. Carter, the general manager, why the step-down method provides a better basis for computing predetermined overhead rates than the direct method
