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. 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.

Department	Total Labor-Hours	Square Feet of Space Occupied	Number of Employees	Machine-Hours	Direct Labor-Hours
Personnel	16,400	12,800	20
Custodial Services	8,500	3,100	49
Maintenance	14,200	10,800	62
Printing	30,400	41,000	110	165,000	12,000
Binding	105,000	20,800	304	50,000	71,000
	174,500	88,500	545	215,000	83,000

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

Personnel	$	330,000
Custodial Services		65,400
Maintenance		93,200
Printing		413,000
Binding		169,000
Total budgeted cost	$	1,070,600

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 departments.

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	2,200	1,200
Binding Department	500	14,000
Total hours	2,700	15,200

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.

Answer 1

Answer is given below

1.	Step Down method	Service Department	Operating Department
		Personnel	custodial services	Maintenance	Printing	Binding
	Departmental costs before allocations	$330,000	$65,400	$93,200	$413,000	$169,000
	Allocation
	Personnel	-$330,000	$30,800	$38,971	$69,143	$191,086
	(Ratio of 49:62:110:304)
	Custodial services		-$96,200	$14,311	$54,328	$27,561
	(Ratio of 108:410:208)
	Maintenance			-$146,482	$112,417	$34,066
	(Ratio of 165:50)
	Total cost after allocation	$0	$0	$0	$648,887	$421,713
	Predetermined overhead rates
	Machine hours				165,000
	Direct labor hours					71,000
	Printing Department -Machine hour rate			$3.93
	Binding Department - Direct labor hour rate				$5.94
2.	Direct Allocation	Service Department	Operating Department
		Personnel	custodial services	Maintenance	Printing	Binding
	Departmental costs before allocations	$330,000	$65,400	$93,200	$413,000	$169,000
	Allocation
	Personnel	-$330,000			$87,681	$242,319
	(Ratio of 110:304)
	Custodial services		-$65,400		$43,388	$22,012
	(Ratio of 410:208)
	Maintenance			-$93,200	$71,526	$21,674
	(Ratio of 165:50)
	Total cost after allocation	$0	$0	$0	$615,595	$455,005
	Predetermined overhead rates
	Machine hours				165,000
	Direct labor hours					71,000
	Printing Department -Machine hour rate			$3.73
	Binding Department - Direct labor hour rate				$6.41
3.	Step down method	$91,806
	Direct method	$97,927
	Step down method
		Basis	hours	OH rate	Total
	Printing Department	Machine hours	2,200	$3.93	$8,652
	Binding Department	Direct Labor hour	14,000	$5.94	$83,155
	Total Overheads allocated				$91,806
	Direct method
		Basis	hours	OH rate	Total
	Printing Department	Machine hours	ekkarill92 Next > < Previous Related Solutions “This is really an odd situation,” said Jim Carter, general manager of Highland Publishing Company. “We... “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... “This is really an odd situation,” said Jim Carter, general manager of Highland Publishing Company. “We... “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. 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