Case: step-down method (adapted GAR) "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 Publishin 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. Total labor-hours Square feet of space occupied Number of employees Machine-hours Direct labor-hours Department Personnel 20.000 4.000 10 Custodial Services 30.000 6.000 15 Maintenance 50.000 20.000 25 90.000 80.000 40 150.000 60.000 Printing Binding 260.000 40.000 120 30.000 175.000 235.000 450.000 150.000 210 180.000 Budgeted overhead costs in each department for the current year are shown below: $ Department Personnel $360.000 Custodial Services $141.000 $201.000 Maintenance Printing Binding $252.000 $373.500 Required: (a) 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. |(b) 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 15.400 900 Printing Department Binding Department Total hours 800 2.000 16.200 2.900 (i) Determine the amount of overhead costs that would be assigned to the job if the company used the overhead rates computed in (a) above. (ii) Determine the amount of overhead cost that would be assigned to the job if the company used the plantwide overhead rate method (allocation base: machine-hours). (c) Explain to Mr. Carter, the general manager, why the step-down method provides a better basis for computing predetermined overhead rates than the plantwide overhead rate