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

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 he 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 arc allocated to other departments in the order listed on the following page. (For each service department, use the allocation base that provides the best measure of service provided, as discussed in the chapter.)

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

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 for the current year using 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:

a. Determine the amount of overhead cost that would be assigned to the job if the company used the overhead rates developed in (I) 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.

b. Explain to Mr. Carter, the general manager, why the step-down method provides a better basis for computing predetermined overhead rates than the direct method.

Square Feet of Space pied 4,000 6,000 Total Labor- Hours Number of Employees Direct Department Machine- Hours Labor- Hours Personnel 20,000 10 Custodial Services Maintenance 30,000 15 25 50,000 20,000 60,000 40 Printing 150,000 90,000 80,000 120 Binding 30,000 175,000 260000 450,000 40,000 210 180,000 235,000 150,000