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	16,000	12,600	25
Custodial Services	8,300	3,500	49
Maintenance	14,800	10,400	65
Printing	30,900	40,100	106	166,000	11,000
Binding	101,000	20,600	307	42,000	76,000
	171,000	87,200	552	208,000	87,000

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

Personnel	$	330,000
Custodial Services		65,400
Maintenance		93,900
Printing		416,000
Binding		165,000
Total budgeted cost	$	1,070,300

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 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	2,300	1,400
Binding Department	700	13,700
Total hours	3,000	15,100

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.

Repeat requirement 1 above, this time using the direct method. Again compute predetermined overhead rates in 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 "Predetermined overhead rate" to 2 decimal places and rest of the answers to the nearest whole dollar amount.)

Answer 1

Solution 1:
	Personnel	Custodial services	Maintenance	Printing	Binding
Total cost before allocations	330000	65400	93900	416000	165000
Allocation:
Personnel (49:65:106:307)	-330000	30683	40702	66376	192239
Custodial (10400:40100:20600)		-96083	14054	54190	27838
Maintenance (166000:42000)			-148656	118639	30017
Total Overhaed Cost after allocations				655205	415095
Divide by machine-hours				166000
Divide by direct labor-hours					76000
Predetermined Overhead rate				3.95	5.46

Solution 2:
	Personnel	Custodial services	Maintenance	Printing	Binding
Total cost before allocations	330000	65400	93900	416000	165000
Allocation:
Personnel (106:307)	-330000			84697	245303
Custodial (40100:20600)		-65400		43205	22195
Maintenance (166000:42000)			-93900	74939	18961
Total Overhaed Cost after allocations				618842	451458
Divide by machine-hours				166000
Divide by direct labor-hours					76000
Predetermined Overhead rate				3.73	5.94

Solution 3:
Step Down Method:	Printing	Binding	Total
Machine Hours	2300
Direct labor hours		13700
*Predetermined Overhead rate	3.95	5.46
Overhead assigned to Job	9085	74802
Total overhead cost (step down method)			83887
Direct mathod:	Printing	Binding	Total
Machine Hours	2300
Direct labor hours		13700
*Predetermined Overhead rate	3.73	5.94
Overhead assigned to Job	8579	81378
Total overhead cost (Direct method)			89957