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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

Anand Components Ltd. has production departments X and Y and service departments S and T. Primary overheads: X Rs 50,000; Y Rs 40,000; S Rs 20,000; T Rs 10,000. S serves X, Y and T in the ratio 40:40:20. T serves X, Y and S in the ratio 50:30:20. Using the repeated distribution (reciprocal) method, what are the total overheads of S after allowing for T's share, i.e. the total to be distributed from S (algebraic solution)?

Solving S = 20,000 + 0.2T and T = 10,000 + 0.2S gives S of about Rs 22,917, which does not match the listed options.

  1. ARs 25,000Correct
  2. BRs 22,500
  3. CRs 24,000
  4. DRs 26,000

Explanation

Let S = 20,000 + 0.2T and T = 10,000 + 0.2S. Then S = 20,000 + 0.2(10,000 + 0.2S) = 22,000 + 0.04S, so 0.96S = 22,000 and S = 22,916.67. This does not match any option exactly, so the key shown is flawed.

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