Question

1. Leader Company has two support departments (S1 and S2) and two producing departments (P1 and P2). Estimated direct costs and percentages of services used by these departments are as follows:

Allocation of support departments	S1	S2	P1	P2
S1	-	10%	40%	50%
S2	20%	-	50%	30%
Direct costs	£4,500	£8,000	£10,000	£15,000

        Required:

a.	Prepare a schedule allocating the support department costs to the producing departments using the direct allocation method.
b.	Prepare a schedule allocating the support department costs to the producing departments using the sequential allocation method.

2. Describe the differences between support and producing departments. Give two examples of each.

Answer 1

As per direct allocation method support departments do not provide services to each other but only to production departments. So support department cost will be allocated to production departments in the ratio in which they are given to the departments that is of S1 in 4:5 and of S2 in 5:3. Distribution of overheads of Support Departments.

b) As per Sequential Distribution Method Support department provide service to another support department but does not take services back. In the given case since both support department are providing service to each other but as per sequential method only one support department provides service to another So assuming that only S2 gives services to S1 and not taking back we will distribute S2 to S1 P1 & P2 in (20:50:30) and of S1 to P1 & P2  in (4:5). S2 is selected because it provides 20% service to S1 as compared to S1 which only gives 10% to S2.

Producing Departments are the departments that makes the products and services that the organisation is involved in selling. Example : Machining , Finishing

Support Departments are the departments that do not make the products but provide the services to production departments. Example : Quality Control , Canteen