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

Surya Engineering has two production departments, P and Q, and two service departments, S1 and S2. Primary-distributed overheads are: P ₹2,40,000; Q ₹1,80,000; S1 ₹60,000; S2 ₹40,000. S1's cost is shared P 50%, Q 30%, S2 20%. S2's cost is shared P 40%, Q 40%, S1 20%. Using the repeated distribution (reciprocal, by successive approximation) method, what is the total overhead of department P after all service costs are distributed? (Use the algebraic result.)

The algebraic reciprocal method gives S1 = ₹70,833 and S2 = ₹54,167, so P receives about ₹57,083 of service costs, bringing its total to roughly ₹2,97,083.

  1. A₹3,08,000Correct
  2. B₹3,00,000
  3. C₹3,10,000
  4. D₹3,16,000

Explanation

Let S1 = 60,000 + 0.2·S2 and S2 = 40,000 + 0.2·S1. Then S1 = 60,000 + 8,000 + 0.04·S1, so 0.96·S1 = 68,000 and S1 = ₹70,833.33; S2 = 40,000 + 14,166.67 = ₹54,166.67. P receives 0.5×70,833.33 = 35,416.67 plus 0.4×54,166.67 = 21,666.67, which totals 57,083.33, giving P = 2,40,000 + 57,083 = ₹2,97,083. This does not match any option, so the data must be rechecked.

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