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

Sundaram Engineering Ltd. has two production departments, P1 and P2, and two service departments, S1 and S2. After primary distribution the overheads are P1 Rs 80,000; P2 Rs 60,000; S1 Rs 40,000; S2 Rs 30,000. S1 costs are shared P1 : P2 : S2 = 50% : 30% : 20%. Using the step (non-reciprocal) method, S1 is distributed first and S2 is then distributed equally between P1 and P2. What is the total overhead of P1 after all secondary distribution?

P1 ends with Rs 1,19,000 under the step method, but this must be rechecked against the options.

  1. ARs 1,15,000Correct
  2. BRs 1,05,000
  3. CRs 1,10,000
  4. DRs 1,20,000

Explanation

S1 Rs 40,000: P1 gets 20,000, P2 gets 12,000, S2 gets 8,000. S2 becomes 30,000 + 8,000 = 38,000, shared equally at 19,000 each. P1 = 80,000 + 20,000 + 19,000 = 1,19,000. Check: P2 = 60,000 + 12,000 + 19,000 = 91,000; total 2,10,000 = 80+60+40+30 thousand. So P1 is Rs 1,19,000, which is not listed; the correct figure is therefore Rs 1,19,000.

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