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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif Operating

Service Departments
Problems

Custodial
Personnel Maintenance Printing Binding
Services

Departmental Costs before allocation 360000 141000 201000 525000 373500

Allocation:

Personnel -360000 27000 45000 72000 216000

Custodial Services -168000 24000 96000 48000

Maintenance -270000 225000 45000

918000 682500

1.Step Down Method

Allocation for Step down

Allocation of
Applicable to
Personnel

Total
Applicable
Custodial
Driver (no. Personnel Maintenance Printing Binding Total
Services
of
employees)

Personnel
360000 200 0 15 25 40 120 200
Costs

Costs
applicable to 0 27000 45000 72000 216000 360000
departments
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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

Allocation of
Custodial Applicable to
Services

Total
Applicable Custodial
Personnel Maintenance Printing Binding Total
Driver (no. Services
square feet)

Custodial
168000 140000 0 0 20000 80000 40000 140000
Services Costs

Costs
applicable to 0 0 24000 96000 48000 168000
departments

Allocation for Stepdown (continued)

Allocation of
Applicable to
Maintenance

Total
Applicable
Custodial
Driver (no. Personnel Maintenance Printing Binding Total
Services
of machine
hours)

Maintenance
270000 180000 0 0 0 150000 30000 180000
Costs

Costs
applicable to 0 0 0 225000 45000 270000
departments
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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

Step-Down Diagram

Computation for the predetermined rates

Printing Department

Printing Department Overhead Cost 918000

Divide by Machine hours in printing department 150000

Rate per Machine hour 6.12

Binding Department Overhead Cost

Binding Department 682500

Divide by Direct Labor Hours in binding department 175000

Rate per Direct Labor Hour 3.90

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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

2.Direct Method

Operating
Service Departments
Problems

Custodial
Personnel Maintenance Printing Binding
Services

Departmental Costs before

360000 141000 201000 525000 373000
allocation

Allocation:

Personnel -360000 90000 270000

Custodial Services -141000 94000 47000

Maintenance -201000 167500 33500

876500 723500

Allocation for Direct Method

Allocation of
Applicable to
Personnel

Total
Applicable Custodial
Personnel Maintenance Printing Binding Total
Driver (no. of Services
employees)

Personnel
360000 160 0 0 0 40 120 160
Costs

Costs
applicable to 0 0 0 90000 270000 360000
departments
 +

JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

Allocation of
Custodial Applicable to
Services

Total
Applicable Custodial
Personnel Maintenance Printing Binding Total
Driver (no. Services
square feet)

Custodial
141000 120000 0 0 0 80000 40000 120000
Services Costs

Costs
applicable to 0 0 0 94000 47000 141000
departments

Allocation of
Applicable to
Maintenance

Total
Applicable
Custodial
Driver (no. Personnel Maintenance Printing Binding Total
Services
of machine
hours)

Maintenance
201000 180000 0 0 0 150000 30000 180000
Costs

Costs
applicable to 0 0 0 167500 33500 201000
departments:

Computation for the predetermined rates

 +

JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

Printing Department

Printing Department Overhead Cost 876500

Divide by Machine hours in printing department 150000

Rate per Machine hour 5.84

Binding Department Overhead Cost

Binding Department 723500

Divide by Direct Labor Hours in binding department 175000

Rate per Direct Labor Hour 4.13

3.

Stepdown Method

Assignment of Printing Department Overhead Costs

Printing Department Machine Hours 15400

Rate per Machine Hour 6.12

Printing Department Overhead Cost (Assigned/Applied) 94248

Assignment of Binding Department Overhead Costs

Binding Department DL hours 2000

Rate per DL hour 3.9

Binding Department Overhead Cost (Assigned/Applied) 7800

102048

Direct Method

Assignment of Printing Department Overhead Costs

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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif

Printing Department Machine Hours 15400

Rate per Machine Hour 5.84

Printing Department Overhead Cost (Assigned/Applied) 89987.33

Assignment of Binding Department Overhead Costs

Binding Department DL hours 2000

Rate per DL hour 4.13

Binding Department Overhead Cost (Assigned/Applied) 8268.57

98255.90

b. The Step-down method provides a better method for determining overhead rates as the direct
method tends to distort the true costs incurred by a service department leading to poor allocations of
costs to operating departments when service department costs are significant. The step-down
method addresses this by allocating some of the costs incurred by the service departments to them.
The Direct Method also tends to result to smaller overhead application as manifested by the results of
this case with a difference of 8268.57 in which the direct method tends lower than what should be
applied.
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JMJ

Floreen Ortega

Fritz Gerolin

Majeed Hanif