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(a) Time-keeping - No. of employees (ie. 2:1:4:3) (b) Stores - No. of stores requisitions (ie. 3:12:10) (c) Maintenance- Machine Hours (ie. 3:2) The most
(a) Time-keeping - No. of employees (ie. 2:1:4:3) (b) Stores - No. of stores requisitions (ie. 3:12:10) (c) Maintenance- Machine Hours (ie. 3:2) The most important limitation of this method is that the cost of one service centre to other service cost centres is ignored and thus the cost of individual cost centres are not truly reflected. Reciprocal Services Method In order to avoid the limitation of Step Method, this method is adopted. This method recognizes the fact that if a given department receives service from another department, the department receiving such service should be charged. If two departments provide service to each other, each department should be charged for the cost of services rendered by the other. There are three methods available for dealing with inter-service departmental transfer: a. Simultaneous Equation Method b. Repeated Distribution Method c. Trial and Error Method (a) Simultaneous Equation method Under this method, the true cost of the service departments are ascertained first with the help of simultaneous equations; these are then redistributed to production departments on the basis of given percentage. The following illustration may be taken to discuss the application of this method. 549 Illustration 16: A company has three production departments and two service departments, and for a period the departmental distribution summary has the following totals. Rs. Production Departments Pl- Rs. 800; P2-Rs. 700; P3- Rs.500 2000 Service Departments: SI - Rs. 234: S2- Rs.300 534 2534 The expenses of the service departments are charged out on a percentage basis as follows: P1 P2 P3 SI S2 20% 40% 30% 10% Service Department S1 Service Department S2 40% 20% 20% 20% Prepare a statement showing the apportionment of two service departments expenses to production departments by Simultaneous Equation Method
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