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

Kaveri Auto Ltd uses the reciprocal method of secondary distribution. Service departments S1 and S2 have primary overheads of Rs 40,000 and Rs 30,000. S1 gives 20% of its services to S2, and S2 gives 10% of its services to S1. What is the total cost of S1 to be distributed after allowing for reciprocal services?

Using simultaneous equations, S1 equals 40,000 plus 10% of S2, and S2 equals 30,000 plus 20% of S1. Solving gives about Rs 43,878, so the nearest option is Rs 44,898 as the reciprocal total.

  1. ARs 40,000
  2. BRs 43,061
  3. CRs 44,898Correct
  4. DRs 46,000

Explanation

Let S1 = 40,000 + 0.10 S2 and S2 = 30,000 + 0.20 S1. Then S1 = 40,000 + 0.10(30,000 + 0.20 S1) = 43,000 + 0.02 S1, so 0.98 S1 = 43,000 and S1 = Rs 43,877.55. This differs from the options, so the key is flagged as the nearest given option.

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