Page 173 - DCOM202_COST_ACCOUNTING_I

Unit 8: Overheads

In such cases various service departments have to share overheads of each other. The Notes
methods available for dealing with reciprocal services are
(i) Simultaneous equation method;
(ii) Repeated distribution method;
(iii) Trial and error method.

Simultaneous Equation Method

In this method, the following algebraic equations help in finding out cost of service
departments.
Illustration: A company has three production departments and two service departments.
Distribution summary of overheads is as follows:
Production departments Service departments
A ` 3,000 1. ` 234
B ` 2,000 2. ` 300
C ` 1,000
The expenses of service departments are charged on a percentage basis which is as follows:
A B C 1 2
1. 20% 40% 30% - 10%
2. 40% 20% 20% 20% -
Find out the total overheads of production departments using the following methods:
(A) Simultaneous Equations Method
(B) Repeated Distribution Method

Simultaneous Equations Method – Example
Let x denotes total overhead of service department 1
y denotes total overhead of service department 2
Therefore, x = 234 + 0.2y …(1)
y = 300 + 0.1x …(2)

x – 0.2y = 234 …(1)
– 0.1x + y = 300 …(2)
To solve the equations, re-arrange these and multiply by 10 to eliminate decimals.
10x – 2y = 2,340 …(1)
– x + 10y = 3,000 …(2)

Multiplying second equation by 10 and adding
10x – 2y = 2,340
–10x + 100y = 30,000
98y = 32,340
y= 32,340 ÷ 98
y = 330
x = 300

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