Question

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 (For each service department, use the allocation base that provides the best measure of service provided, as discussed in the chapter.)

Department	Total Labor-Hours	Square Feet of Space Occupied	Number of Employees	Machine- Hours	Direct Labor- Hours
Personnel	16,800	12,800	30	—	—
Custodial Services	8,100	3,300	49	—	—
Maintenance	14,300	10,300	62	—	—
Printing	30,100	40,600	109	165,000	20,000
Binding	104,000	20,400	307	41,000	73,000
	173,300	87,400	557	206,000	93,000

   Budgeted overhead costs in each department for the current year are shown below:

Personnel	$	310,000
Custodial Services		65,000
Maintenance		93,300
Printing		415,000
Binding		168,000
Total budgeted cost	$	1,051,300

   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 for the current year using machine-hours as the allocation base in the Printing Department and direct labor-hours as the allocation base in the Binding Department. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

	Personnel	Custodial Services	Maintenance		Printing	Binding
Total cost before allocations	$310,000	$65,000	$93,300		$415,000	$168,000
Allocation:
Personnel
Custodial services
Maintenance
Total overhead cost after allocations
Divide by machine-hours
Divide by direct labor-hours
Predetermined overhead rate

2.	Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in the the Printing and Binding departments. (Please enter allocations from a department as negative and allocations to a department as positive. The line should add across to zero. Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

	Personnel	Custodial Services	Maintenance		Printing	Binding
Total cost before allocations	$310,000	$65,000	$93,300		$415,000	$168,000
Allocation:
Personnel
Custodial services
Maintenance
Total overhead cost after allocations
Divide by machine-hours
Divide by direct labor-hours
Predetermined overhead rate

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	2,100	1,300
Binding Department	500	13,500
Total hours	2,600	14,800

a.	Determine the amount of overhead that would be assigned to the job if the company uses the overhead rates developed in (1) step-down method and (2) direct method. (Round your intermediate calculation to 2 decimal places and round your answers to the nearest dollar amount.)

	Total Overhead Cost
Step-down method
Direct method

Answer 1

1)step Down Method

	Personal	Custodial Services	Maintenance	Printing	Binding
Total Cost Before Allocation	310000	65000	93300	415000	168000
Allocation	No. of Employees	Square Feet Occupied	Based on Machine Hours
Personnel	-310000	28823.53	36470.59	64117.65	180588.24
Custodial Service		-93823.53	13553.75	53425.46	26844.32
Maintenance			-143324.34	114798.62	28525.72
Total Overhead Cost After Allocation	0	0	0	647341.73	403958.27
Divided by Machine Hours				165000
Divided by Direct Labor Hours					73000
Predetermined Overhead Rate				3.92	5.53

2) Direct Cost method

	Personal	Custodial Services	Maintenance	Printing	Binding
Total Cost Before Allocation	310000	65000	93300	415000	168000
Allocation	No. of Employees	Square Feet Occupied	Based on Machine Hours
Personnel	-310000			81225.96	228774.04
Custodial Service		-65000.00		43262.30	21737.70
Maintenance			-93300.00	74730.58	18569.42
Total Overhead Cost After Allocation	0	0	0	614218.84	437081.16
Divided by Machine Hours				165000
Divided by Direct Labor Hours					73000
Predetermined Overhead Rate				3.72	5.99

3)

Step Down Method=2100*3.92+13,500*5.53=$82,943.51

Direct Method= 2100*3.72+13,500*5.99=$88,647.41