Case 4B-7 Step-Down Method versus Direct Method [LO4-10, LO4-11]

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 were 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 (For each service department, use the allocation base that provides the best measure of service provided, as discussed in the chapter.)

Department	Total Labor-Hours	Square Feet of Space Occupied	Number of Employees	Machine- Hours	Direct Labor- Hours
Personnel	16,500	12,300	26
Custodial Services	8,200	3,500	42
Maintenance	14,700	10,300	68
Printing	30,400	40,700	107	167,000	19,000
Binding	103,000	20,100	301	45,000	73,000
	172,800	86,900	544	212,000	92,000

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

Personnel	$	310,000
Custodial Services		65,200
Maintenance		93,300
Printing		412,000
Binding		166,000
Total budgeted cost	$	1,046,500

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

2.

Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in the 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 your answers to the nearest dollar amount.)

Total cost before allocations Allocation Personnel Custodial services Maintenance Total overhead cost after allocations Divide by machine-hours Divide by direct labor-hours Predetermined overhead rate Custodial printing Binding Personnel Maintenance Services 93,300 412.000 166.000 65,200 310,000 (310,000) (65,200) (93,300) 0 0 0 412,000 166,000 0 0