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In: Accounting

“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 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.

Solutions

Expert Solution

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 answered 10 months ago
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