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 16,400 12,800 21 Custodial Services 8,100 3,400 49 Maintenance 14,500 10,900 63 Printing 30,100 40,800 106 162,000 18,000 Binding 107,000 20,700 303 47,000 74,000 176,100 88,600 542 209,000 92,000 Budgeted overhead costs in each department for the current year are shown below: Personnel $ 310,000 Custodial Services 66,000 Maintenance 93,600 Printing 419,000 Binding 169,000 Total budgeted cost $ 1,057,600 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 2,900 1,400 Binding Department 600 13,200 Total hours 3,500 14,600 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.
“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
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 | 16,400 | 12,800 | 21 | ||
| Custodial Services | 8,100 | 3,400 | 49 | ||
| Maintenance | 14,500 | 10,900 | 63 | ||
| Printing | 30,100 | 40,800 | 106 | 162,000 | 18,000 |
| Binding | 107,000 | 20,700 | 303 | 47,000 | 74,000 |
| 176,100 | 88,600 | 542 | 209,000 | 92,000 | |
Budgeted overhead costs in each department for the current year are shown below:
| Personnel | $ | 310,000 |
| Custodial Services | 66,000 | |
| Maintenance | 93,600 | |
| Printing | 419,000 | |
| Binding | 169,000 | |
| Total budgeted cost | $ | 1,057,600 |
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 | 2,900 | 1,400 |
| Binding Department | 600 | 13,200 |
| Total hours | 3,500 | 14,600 |
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.
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