CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method
Kaveri Auto Parts uses the direct (non-reciprocal) method. Overheads before service allocation: Production P1 Rs 2,40,000, P2 Rs 1,80,000, Service S Rs 60,000. S serves P1 and P2 in the ratio 2:1, and also serves... nothing else. Under the direct method, what is the total overhead of P1 after redistribution of S?
P1's total overhead is Rs 2,80,000. The service department cost of Rs 60,000 is shared 2:1, so P1 receives Rs 40,000, which is added to its own Rs 2,40,000. Giving all of S to P1 would be wrong because P2 also uses the service.
- ARs 2,80,000Correct
- BRs 3,00,000
- CRs 2,60,000
- DRs 2,40,000
Explanation
S cost Rs 60,000 is split 2:1 between P1 and P2: P1 gets Rs 40,000 and P2 gets Rs 20,000. P1 total = 2,40,000 + 40,000 = Rs 2,80,000. Check: P2 = 2,00,000, total 4,80,000 = 2,40,000+1,80,000+60,000. Rs 3,00,000 wrongly gives all of S to P1.
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