Notes of a Third year student studying Bachelors of Accounting at the University of the Free State. With this notes that i have compiled, i was able to proudly say that i received a distinction in Managerial Accounting and Financial Management by using this notes. If you are struggling with Financi...
Repeated distribution method Simultaneous equation method
• Establish simultaneous equations
• Ensure there is only one variable
❖ Costs in the service department is allocated repeatedly in the • Solve that variable
specified percentages until the figures become too small to be • Insert that answer (point 3) into the other equation to solve the other
significant variable
• The solved answers are then allocated in the specified percentages
• Answer agrees to total of repeated distribution method
Specified order of closing Direct allocation method
▪ Service departments are allocated to production
departments in a certain order ➢ Ignores inter-service department service reallocations
▪ The service department that does the largest proportion of ➢ Changes the proportions used for allocation
work for the other service department is closed first etc. ➢ Only justification is simplicity
▪ If a service department’s costs have been allocated, no ➢ Recommended when inter-service reallocations are relatively
costs can be allocated to that department again insignificant
▪ Sacrifices accuracy for clerical convenience
, Example
A company has three production departments and two service departments. The overhead analysis sheet provides the following totals of the
overheads analyzed to production and service departments:
Production department X 48 000
Y 42 000
Z 30 000
Service department 1 (y) 14 040
2 (x) 18 000
The expenses of these service departments are apportioned as follows:
Production departments Service departments
X Y Z 1 2
Service department 1 20% 40% 30% - 10%
Service department 2 40% 20% 20% 20% -
, Simultaneous equation method
A company has three production departments and two service departments. The overhead analysis sheet provides the following totals of the
overheads analyzed to production and service departments:
Production department X 48 000
Y 42 000 Do not use
Z 30 000
information
Service department 1 (y) 14 040
2 (x) 18 000
The expenses of these service departments are apportioned as follows:
Production departments Service departments
X Y Z 1 2
Service department 1 20% 40% 30% - 10%
Service department 2 40% 20% 20% 20% -
The overhead transferred into service departments 1 (y) and 2 (x)
can be expressed as:
x = 14 040 + 0.2y Calculate y:
10y – 180 000 = 14 040 + 0.2y
y = 18 000 + 0.1x
9.8y = 194 040
y = 19 800
Rearrange the equation 2:
y – 18 000 = 0.1x
Calculate x:
10y – 180 000 = x
x = 14 040 + 0.2(19 800)
x = 18 000
, Specific order of closing (return charges are not made)
Production departments Service departments
X Y Z 1 2
Allocation as per overhead
48 000 42 000 30 000 14 040 18 000
analysis
Allocation per service
7 200 (40%) 3 600 (20%) 3 600 (20%) 3 600 (20%) (18 000)
department 2
Allocation per service
3920 (2/9) 7840 (4/9) 5880 (3/9) (17 640) -
department 1
Totals
Distributes more to service department 1 thus service department 2 should be closed first
% Should be calculated according to service department 2 Balancing amount
% Should be calculated according balancing amount 100 – 10 = 90
Divide % with 90
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