This is really an odd situation,\" said Jim Carter, general manager of Highland

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 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 (For each service department, use the allocation base that provides the best measure of service provided, as discussed in the chapter.) quare Direct Labor- Hours Feet Total of Space Number of Machine- Department Personnel Custodial Services Maintenance Printing Binding Labor-Hours Occupied Employees Hours 16,800 2,300 8,900 3,300 11,000 30,600 40,700 01,000 20,700 20 50 69 103 166,000 20,000 14,000 305 45,000 75,000 171,300 88,000 547 211,000 95,000 Budgeted overhead costs in each department for the current year are shown below: Personnel Custodial Services Maintenance Printing Binding $ 320,000 65,300 93,100 418,000 162,000 Total budgeted cost $1,058,400

Explanation / Answer

1) Under step method, we will first allocate personnel cost to other departments on the basis labour hrs excluding personnel labour hrs

Overhead Rate = Personnel cost/ Total labour hrs excluding Personnel own lab hrs

= 320000/(8900+14000+30600+101000) = 320000/154500 = 2.071 per lab hr

Now, we will allocate custodial services cost into remaining dept

Toal Custodial Services cost = Actual cost + Allocated Personnel cost

= 65300+(2.071*8900) = 65300+18433.65 = 65300+18434 = 83734

So, allocated rate = 83734/(11000+40700+20700) = 83734/72400 = 1.1565 per square feet

Now, we will allocate maintenance cost on the basis No. of employees

Total Maintenance Cost = Actual cost+ Allocated Personnel cost + Allocated Custodial Cost

= 93100+ (2.071*14000)+(1.1565*11000)

= 93100+28997+12722 = 134819

So Allocated rate = 134819/(103+305) = 330.438 per No of employees

2)Under the direct method, personnel, Custodial Services & Maintenance department cost will be directly allocated to printing & Binding Department

30600+101000

=131600

40700+20700

=61400

103+305

=408

So allocation under Direct Method is as follows

3) Under Step down Method

Printing dept = 2800*2.67+1100*5.22 =7476+5742 = 13218

Binding Dept = 400*2.67+13200*5.22 = 1068+68904 = 69972

So total overhead Cost = 13218+69972 = 83190

Under Direct Method

Printing Dept = 2800*2.65+1100*5.25 = 7420+5775 = 13195

Binding dept = 400*2.65+13200*.5.25 = 1060+69300 = 70360

So Total overhead cost = 13195+70360 = 83555

Particulars Personnel Custodial Maintenance Printing Binding Total cost 320000 65300 93100 418000 162000 Allocation: Personnel -320000 18434 28997 63379 209190 Custodial - -83734 12722 47071 23941 Maintenance - - -134819 34035 100784 Total Overhaed Cost - - - 562485 495915 Divide by machine hrs 211000 - Divide by direct lab hrs - 95000 Predetermined rate 2.6658 5.2201

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