Example of methods of allocating service costs, Cost Accounting

Example of Methods of Allocating Service Costs

Suppose the following data:

User department

Unit of Service Provided

Costs Prior to Service Department

 

S1

S2

S3

Shs.

S1

         0

  2,000

  4,500

     92,400

S2

  1,000

         0

         0

   184,800

S3

  2,000

  4,000

         0

   138,600

P1

  4,000

10,000

  1,500

   400,000

P2

  3,000

  4,000

  9,000

   500,000

Totals

10,000

20,000

15,000

1,315,800

Direct method

 

S1

S2

S3

P1

P2

TOTAL

Cost Prior to Allocation

 92,000

 184,800

 138,600

400,000

500,000

 

Allocate S1(4:3)

(92,400)

-

-

52,800

  39,600

 

Allocate S2 (5:2)

-

(184,800)

-

132,000

  52,800

 

Allocate S3(1:6)

-          

-          

(138,600)

  19,800

118,800

 

 

-          

-          

-          

604,600

711.200

 

 

 

 

 

 

 

1,315,800

 

Step-wise Method     

 

S1

S2

S3

P1

P2

TOTAL

Cost Prior to Allocation

 92,000

 184,800

 138,600

400,000

500,000

 

Allocate S1(1:2:4:3)

92,400

9,240

18,480

36,960

27,720

 

 

 

194,040

157,080

436,960

527,720

 

Allocate S2(2:5:3)

 

(194,040)

43,120

107,800

43,120

 

 

 

-          

200,200

544,760

570,840

 

Allocate S3(1:6)

 

 

(200,200)

28,600

171,600

 

 

 

 

-

573,360

742,440

 

 

 

 

 

 

 

1,315,800

Reciprocal Method

Let Sa represent the net costs of service dept 1

Let Sb represent the net costs of service dept 2

Let Sc represent the net costs of service dept 3

Sa = 92,400 + 0.15b + 0.3 Sc--------------------------Eq(i)

Sb = 184,800 + 0.1 Sa ----------------------------------Eq(ii)

Sc  = 138,600 + 0.2 Sa + 0.2 Sb----------------------Eq(iii)

After substituting Equation (iii) into Equation (i) and solving, then we get;

Sa = 92,400 + 0.1 (184,800 + 0.1 Sa) + 0.35c

Sa = 92,400 + 18,480 + 0.01 Sa + 0.3Sc

0.99 Sa = 110,880 + 0.3Sc--------------------------Eq(iv)

After substituting Equation (ii) into Equation (iii) and solving, then we get,

Sc  = 138,600 + 0.2Sa + 0.2 (184,800 + 0.1Sa)

Sc  = 138,600 + 0.2Sa + 0.22Sc--------------------------Eq(v)

After substituting (v) into Eq(iv) and solving then we get,

0.99Sa = 110,880 + 0.3 (175,560 + 0.22Sa),

0.99Sa = 163,548 + 0.066 Sa

0.924Sa = 163,548

Sa = 163,548= 177,000

Consequently Sb = 184,800 + 0.1 (Sa) = 184,800 + 0.1(177,000) = Shs.202, 500

                      Sc = 138,600 + 0.2(177,000) + 0.2(202,500) = Shs.214, 500

 

S1

S2

S3

P1

P2

Costs before allocation

   92,400

 184,800

138,600

400,000

500,000

Costs after recognition

  177,000

 202,500

214,500

 

 

Allocate costs S1(1:2:4:3)

(177,000)

     17,700

35,400

70,800

53,100

Allocate S2 (2:4:10:4)

   20,250

(202,500)

40,500

101,250

40,500

AllocateS3 (3:1:6)

   64,350

-          

(214,500)

21,450

128,700

 

-          

-          

-          

593,500

722,300

Posted Date: 2/5/2013 7:58:46 AM | Location : United States







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