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 12,400 25 Custodial Services 8,200 4,000 42 Maintenance 14,700 10,600 67 Printing 30,600 40,100 107 169,000 15,000 Binding 103,000 20,900 302 48,000 72,000 173,000 88,000 543 217,000 87,000 Budgeted overhead costs in each department for the current year are shown below: Personnel $ 330,000 Custodial Services 65,400 Maintenance 93,300 Printing 418,000 Binding 161,000 Total budgeted cost $ 1,067,700 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 2,700 1,300 Binding Department 800 13,500 Total hours 3,500 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

MaintenancePrintingBindingTotalOverhead cost$300,000$65,700$93,800$415,000$162,000$1,036,500Allocate personnel based on number of employees (555 - 28 = 527)(300,000)27,32434,72561,480176,4710Allocate custodial services based on sq ft (87,100 - 12,300 - 3,500 = 71,300)(93,024)13,56952,97026,4850Allocate maintenace based on total labor horus (30,600 + 102,000 = 132,600)(142,094)32,791109,3030$0$0$0$562,241$474,259$1,036,500

PrintingBindingEstimated overhead cost$562,241$474,259Estimated overhead driver165,000 machine hours73,000 direct labor hoursPredetermined overhead rate$3.41 per machine hour$6.50 per direct labor hour

2.

PersonnelCustodial ServicesMaintenancePrintingBindingTotalOverhead cost$300,000$65,700$93,800$415,000$162,000$1,036,500Allocate personnel based on number of employees (108 + 310 = 418)(300,000)77,512222,4880Allocate custodial services based on sq ft (40,600 + 20,300 = 60,900)(65,700)43,80021,9000Allocate maintenace based on total labor horus (30,600 + 102,000 = 132,600)(93,800)21,64672,1540$0$0$0$557,958$478,542$1,036,500

PrintingBindingEstimated overhead cost$557,958$478,542Estimated overhead driver165,000 machine hours73,000 direct labor hoursPredetermined overhead rate$3.38 per machine hour$7.93 per direct labor hour

3.

a.

(1) Step-down rates

PrintingBindingTotalPredetermined overhead rate$3.41 per machine hour$6.50 per direct labor hourUnits required by the job2,20013,700Overhead cost to be allocated$7,502$89,050$96,552

(2) Direct method rates

PrintingBindingTotalPredetermined overhead rate$3.38 per machine hour$7.93 per direct labor hourUnits required by the job2,20013,700Overhead cost to be allocated$7,436$108,641$116,077