"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. 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 Total Labor- of Space Number of Machine- Direct Labor- Department Hours Occupied Employees Hours Hours Personnel 16,500 12,900 29 Custodial Services 8,700 3,700 Maintenance 14,300 10,700 70 Printing 30,900 40,500 101 168,000 12,000 Binding 103,000 20,200 47,000 72,008 173,400 88,000 552 215,000 84,900 44 308 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding Total budgeted cost $ 300,000 65,200 93,700 414,000 166,000 $1,038,900 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 3. Assume that during the current year the company bids on a job that requires machine and labor time as follows Direct Machine-Hours Printing Department 2,700 1,400 Binding Department 13,000 Total hours 3,200 14,400 Labor-Hours 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
