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 16,500 12,900 28 Custodial Services 8,100 4,000 44 Maintenance 14,400 10,400 70 Printing 30,400 40,400 109 162,000 20,000 Binding 101,000 20,500 303 49,000 77,000 170,400 88,200 554 211,000 97,000 Budgeted overhead costs in each department for the current year are shown below: Personnel $ 340,000 Custodial Services 65,500 Maintenance 94,000 Printing 415,000 Binding 161,000 Total budgeted cost $ 1,075,500 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 2,900 1,500 Binding Department 400 13,300 Total hours 3,300 14,800 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

1. Step down method:

		Personnel	Custodial services	Maintenance	Printing	Binding
Direct departmental cost		$340,000	$65,500	$94,000	$415,000	$161,000
Allocation:
Personnel cost	44:70:109:303=526	-340,000	28,441	45,247	70,456	195,856
Custodial services	104:404:205=713		-93,941	13,702	53,229	27,010
Maintenance	162:49=211			-152,949	117,430	35,519
Total cost		$0	$0	$0	$656,115	$419,385
Allocation basis					162,000	77,000
Predetermined overhead rate					$4.05	$5.45

2. Direct method:

		Personnel	Custodial services	Maintenance	Printing	Binding
Direct departmental cost		$340,000	$65,500	$94,000	$415,000	$161,000
Allocation:
Personnel cost	109:303=412	-340,000			89,951	250,049
Custodial services	404:205=609		-65,500		43,452	22,048
Maintenance	162:49=211			-94,000	72,171	21,829
Total cost		$0	$0	$0	$620,574	$454,926
Allocation basis					162,000	77,000
Predetermined overhead rate					$3.83	$5.9

3.

1. Step down method

Printing	$11,745 (2,900*$4.05)
Binding	72,485 (13,300*$5.45)
Total overhead cost assigned to Job	$84,230

2. Direct method:

Printing	$11,107 (2,900*$3.83)
Binding	78,470 (13,300*$5.9)
Total overhead cost assigned to Job	$89,577