Question

Amron Ltd has three production departments: M, N, and O and two service departments P and Q. The following particulars are available for the month of March 2020:

Particulars	Amount ($)
Lease rental	35,000
Industrial power and fuel	420,000
Wages to supervisor of production departments	6,400
Electricity	5,600
Depreciation on machinery	16,100
Depreciation on building	18,000
Payroll expenses	21,000
Canteen expenses	28,000
Superannuation contribution	58,000

Further information regarding the above indirect expenses are as follows:

Particulars	M	N	O	P	Q
Floor space (square meters)	1,200	1,000	1,600	400	800
Electricity connection points	42	52	32	18	18
Cost of machines ($)	1,200,000	1,000,000	1,400,000	400,000	600,000
Number of employees	48	52	45	15	25
Direct wages ($)	172,800	166,400	153,000	36,000	53,000
Horse power of machines	150	180	120	-	-
Working hours	1,240	1,600	1,200	1,440	1,440

Working hours multiplied by horsepower of machines provides a basis for allocating industrial power and fuel charges. Direct material amounts to 150% of direct wages.

Required:

1. (a) Calculate the total cost of the production and service departments after allocating the above listed indirect expenses to production and service departments using appropriate allocation bases.

2. (b) Recalculate the total cost of production departments after reallocating the cost of service departments to production departments based on reciprocal method (simultaneous equations method). The percentage of support provided by the service departments to the other departments is as follows: (8 Mark

Particulars	M	N	O	P	Q
Support provided by department P	30%	35%	25%	-	10%
Support provided by department Q	40%	25%	20	15%	-

Answer 1

(a)

			Production Department			Service Department
Particulars	Basis for Allocation	Amount	M	N	O	P	Q
Lease rental	Floor space	35000	8400	7000	11200	2800	5600
Industrial power and fuel*	HP of machines x Working hours**	420000	126408	195728	97864	0	0
Wages to supervisor*	Working hours	6400	1964	2535	1901	0	0
Electricity	Electricity connection points	5600	1452	1798	1106	622	622
Depreciation on machinery	Cost of machines	16100	4200	3500	4900	1400	2100
Depreciation on building	Floor space	18000	4320	3600	5760	1440	2880
Payroll expenses	Number of employees	21000	5449	5903	5108	1703	2838
Canteen expenses	Number of employees	28000	7265	7870	6811	2270	3784
Superannuation contribution	Direct wages	58000	17244	16606	15268	3593	5289
Total $		608100	176702	244539	149919	13828	23113

*Allocated to production departments only.

**	M	N	O	Total
Horse power of machines	150	180	120
x Working hours	1240	1600	1200
Total	186000	288000	144000	618000

(b) Assuming P as the overhead for service department P and Q as the overhead for service department Q, total overheads are:

P = $13828 + 0.15Q

Q = $23113 + 0.10P

Substituting for Q, we get:

P = 13828 + 0.15 x (23113 + 0.10P)

P = 13828 + 3466.95 + 0.015P

P - 0.015P = 17294.95

0.985P = 17294.95

P = 17558

Q = 23113 + (0.10 x 17558)

Q = 23113 + 1755.80

Q = 24869

		Production Department
	Amount	M	N	O
Direct wages	492200	172800	166400	153000
Direct materials (150% x direct wages)	738300	259200	249600	229500
Overheads (from a. above)	571160	176702	244539	149919
Allocation from service departments:
P (90% x $17558)	15802	5267	6145	4390
Q (85% x $24869)	21139	9948	6217	4974
Total cost $		623917	672902	541782

Note: All intermediate calculations and final answers have been rounded off to the nearest whole dollar amount in the absence of specific instructions regarding rounding off. Kindly round off as required. Answers may vary due to any other rounding off.