example of methods of allocating service

Question

Example of Methods of Allocating Service Costs

Suppose the following data:

User department	Unit of Service Provided			Costs Prior to Service Department
	S1	S2	S3	Shs.
S1	0	2,000	4,500	92,400
S2	1,000	0	0	184,800
S3	2,000	4,000	0	138,600
P1	4,000	10,000	1,500	400,000
P2	3,000	4,000	9,000	500,000
Totals	10,000	20,000	15,000	1,315,800

Direct method

	S1	S2	S3	P1	P2	TOTAL
Cost Prior to Allocation	92,000	184,800	138,600	400,000	500,000
Allocate S1(4:3)	(92,400)	-	-	52,800	39,600
Allocate S2 (5:2)	-	(184,800)	-	132,000	52,800
Allocate S3(1:6)	-	-	(138,600)	19,800	118,800
	-	-	-	604,600	711.200
						1,315,800

 

Step-wise Method     

	S1	S2	S3	P1	P2	TOTAL
Cost Prior to Allocation	92,000	184,800	138,600	400,000	500,000
Allocate S1(1:2:4:3)	92,400	9,240	18,480	36,960	27,720
		194,040	157,080	436,960	527,720
Allocate S2(2:5:3)		(194,040)	43,120	107,800	43,120
		-	200,200	544,760	570,840
Allocate S3(1:6)			(200,200)	28,600	171,600
			-	573,360	742,440
						1,315,800

Reciprocal Method

Let Sa represent the net costs of service dept 1

Let Sb represent the net costs of service dept 2

Let Sc represent the net costs of service dept 3

Sa = 92,400 + 0.15b + 0.3 Sc--------------------------Eq(i)

Sb = 184,800 + 0.1 Sa ----------------------------------Eq(ii)

Sc  = 138,600 + 0.2 Sa + 0.2 Sb----------------------Eq(iii)

After substituting Equation (iii) into Equation (i) and solving, then we get;

Sa = 92,400 + 0.1 (184,800 + 0.1 Sa) + 0.35c

Sa = 92,400 + 18,480 + 0.01 Sa + 0.3Sc

0.99 Sa = 110,880 + 0.3Sc--------------------------Eq(iv)

After substituting Equation (ii) into Equation (iii) and solving, then we get,

Sc  = 138,600 + 0.2Sa + 0.2 (184,800 + 0.1Sa)

Sc  = 138,600 + 0.2Sa + 0.22Sc--------------------------Eq(v)

After substituting (v) into Eq(iv) and solving then we get,

0.99Sa = 110,880 + 0.3 (175,560 + 0.22Sa),

0.99Sa = 163,548 + 0.066 Sa

0.924Sa = 163,548

Sa = 163,548= 177,000

Consequently Sb = 184,800 + 0.1 (Sa) = 184,800 + 0.1(177,000) = Shs.202, 500

                      Sc = 138,600 + 0.2(177,000) + 0.2(202,500) = Shs.214, 500

	S1	S2	S3	P1	P2
Costs before allocation	92,400	184,800	138,600	400,000	500,000
Costs after recognition	177,000	202,500	214,500
Allocate costs S1(1:2:4:3)	(177,000)	17,700	35,400	70,800	53,100
Allocate S2 (2:4:10:4)	20,250	(202,500)	40,500	101,250	40,500
AllocateS3 (3:1:6)	64,350	-	(214,500)	21,450	128,700
	-	-	-	593,500	722,300