Case $4$B$-6($Algo$)$ Step$-$Down Method versus Direct Method $[$LO$4-10,$ LO$4-11]$

$$This is really an odd situation,$$ 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 offering 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 $16,40012,20024$

Custodial Services $8,6003,70043$

Maintenance $14,20010,00064$

Printing $30,30040,000102165,00014,000$

Binding $109,00020,50030948,00080,000$

$178,50086,400542213,00094,000$

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

Personnel $ $310,000$

Custodial Services $65,800$

Maintenance $93,600$

Printing $413,000$

Binding $163,000$

Total budgeted cost $ $1,045,400$

Because of its simplicity, the company has always used the direct method to allocate service department costs to the two operating departments.

Required:

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.

Repeat $(1)$ above, this time using the direct method. Again compute predetermined overhead rates in the Printing and Binding departments.

Assume during the current year the company bids on a job requiring machine and labor time as follows:

Machine$-$Hours Direct Labor$-$Hours

Printing Department $2,3001,500$

Binding Department $50013,900$

Total hours $2,80015,400$

Calculate the overhead cost assigned to the job if the company used the overhead rates developed in $(1)$ above. Then calculate the overhead cost assigned to the job if the company used the overhead rates developed in $(2)$ above.