Skip to content

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

Kaveri Textiles has two service departments, S1 and S2, and two production departments, P1 and P2. Overheads before service allocation: S1 ₹60,000, S2 ₹40,000, P1 ₹1,50,000, P2 ₹1,00,000. S1 services are shared S2 20%, P1 40%, P2 40%. S2 services are shared S1 25%, P1 25%, P2 50%. Using the repeated distribution/simultaneous equation method, what is the total overhead of P1 after complete reallocation?

Solving the reciprocal equations gives S1 about ₹73,684 and S2 about ₹54,737. P1 then receives 40% of S1 and 25% of S2, so its total is about ₹1,93,158. This differs from the listed options.

  1. A₹2,00,000Correct
  2. B₹1,98,000
  3. C₹1,95,000
  4. D₹2,02,000

Explanation

Let S1 = 60,000 + 0.25 S2 and S2 = 40,000 + 0.20 S1. Then S1 = 60,000 + 0.25(40,000 + 0.2 S1) = 70,000 + 0.05 S1, so S1 = 70,000/0.95 = ₹73,684 (approx.), and S2 = 40,000 + 14,737 = ₹54,737. P1 = 1,50,000 + 0.4×73,684 + 0.25×54,737 = 1,50,000 + 29,474 + 13,684 = ₹1,93,158. This is not among the clean options, so no option matches exactly.

Did you get it right without looking?

One question tells you little. A timed set on Overheads - Absorption Costing Method shows your real accuracy, how long you take and where you lose marks.

Practise Overheads - Absorption Costing MethodFree diagnostic mock

More Overheads - Absorption Costing Method questions