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  • 1.  P1 - Service Dept.cost

    Posted 08-23-2013 09:13 AM

    Hi Ganesan Siva, Thanks for the explanation for service dept. cost to other dept. using the three methods i.e. Direct, step down and reciprocal,  but in the reciprocal method we suppose to use a equation to solve the problem, i tried but I cound't, can you please explain the following.

    A company has two service Dept. (S1 and S2) and Two production Dept. (P1 and P2). Departmental data for January as follows : 

      S1     S2
    Cost incurred :             27,000.00   18,000.00 
    Service provided to : 

    S1 ---  20% 
    S2 10% ----- 
    P1 50% 30% 
    P2 40% 50% 

    What are the total allocated service department cost to P2 if the company uses the reciprocal method of allocating its service department costs ?
    -------------------------------------------
    Noor Mohamed
    Accountant
    FTV Proclad LLC
    Dubai
    United Arab Emirates
    -------------------------------------------


  • 2.  RE:P1 - Service Dept.cost

    Posted 08-23-2013 12:43 PM
    Noor,

    Reciprocal method fully recognizes all interdepartmental services costs using simultaneous equations. I had given detailed workings for your understanding. But, we do not need such detailed information while practicing. Such problems can kill our time but by practice we can complete within 1.8 minutes 

    Question: Calculate total costs of P2 dept. using reciprocal method
    S1 S2 P1 P2
    Costs $ 27,000 $ 18,000 $ - $ -
    S1 Allocation 0% 10% 50% 40%
    S2 Allocation 20% 0 30% 50%
    Answers:
    First, we need to uderstand that S1 will consume 20% of S2's costs
    S1 = 27000 + (20% / (20%+30%+40%)x S2)
    S1 = 27000 + 0.2 x S2
    Similarly, S2 will consume 10% of S1's costs
    S2 = 18000+ (10% / (10%+50%+40%)x S1)
    S2 = 18000+ 0.1 x S1
    Calculate S1 total costs,
    S1 = 27000 + 0.2 x S2
    S1 = 27000+0.2(18000+.1S1)
    S1 = 30600+.02S1
    S1-.02S1 = 30600
    0.98S1 = 30600
    S1 = 31224.49
    Calculate S2 total costs,
    S2 = 18000+.1 x S1
    18000+.1 x (27000+0.2S2)
    18000+2700+0.02S2
    S2 = 20700+.02S2
    S2-0.02S2 = 20700
    0.98 S2 = 20700
    S2 = 21122.45
    S1 S2 P1 P2 Total
    Costs $ 27,000 $ 18,000 $ - $ - $ 45,000
    Step1 $ (31,224) $ 3,122 $ 15,612 $ 12,490 $ -
    Step2 $ 4,224 $ (21,122) $ 6,337 $ 10,561 $ -
    Total Costs $ - $ - $ 21,949 $ 23,051 $ 45,000
    S1 Allocation 0% 10% 50% 40% 100%
    S2 Allocation 20% 0 30% 50% 100%

    Kindly acknowledge if I'm correct as well...
    -------------------------------------------
    Ganesan Sivalingam
    Accountant
    Sharqiyah Desalination Co SAOG
    Muscat, Sultanate of Oman
    Oman
    -------------------------------------------






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