IOT Solutions Tech Pvt. Ltd., a leading provider of innovative IoT solutions and cutting-edge technology products, outlines the following budgeted…

CA Intermediate · Cost and Management Accounting · MTP · September 2025
IOT Solutions Tech Pvt. Ltd., a leading provider of innovative IoT solutions and cutting-edge technology products, outlines the following budgeted and actual hours used for its two central corporate support departments, Finance and IT. These departments collaborate with one another and provide essential support to the company's two manufacturing divisions: Mobile Devices (MD) and Desktop Solutions (DS). Particulars Support Department Operating Department Finance IT MD DS Budgeted Usage Finance (hours) 750 4,500 2,250 (%) 10% 60% 30% IT (hours) 7,500 67,500 75,000 (%) 5% 45% 50% Actual Usage Finance (hours) 1,200 1,200 3,600 (%) 20% 20% 60% IT (hours) 6,000 79,800 34,200 (%) 5% 66.5% 28.5% The overhead costs under these two support departments before any inter-department cost allocations are also outlined as below: Particulars Support Department Finance (₹) IT (₹) Budgeted fixed overhead costs 22,96,800 30,30,500 Actual variable overhead costs 12,76,000 38,28,000 The company uses dual-rate method of apportioning support departments cost to its operating departments where fixed overhead costs are apportioned using budgeted hours used by other departments, and variable overhead costs are apportioned using actual hours used by other departments. You are required to PREPARE a statement apportioning the costs of support departments over the operating departments using: (i) Direct method, (ii) Step-down method (apportioning the Finance department costs first), and (iii) Reciprocal method (using simultaneous equation).

Suggested Answer and Working Notes:

(i) Direct method of apportioning the costs of support departments over the operating departments. Items of cost Basis of apportionment Total (₹) Operating Departments MD (₹) DS (₹) Fixed overhead costs: Finance 4,500 : 2,250 22,96,800 15,31,200 7,65,600 IT 67,500 : 75,000 30,30,500 14,35,500 15,95,000 Total fixed overhead costs apportioned (A) 53,27,300 29,66,700 23,60,600 Variable overhead costs: Finance 1,200 : 3,600 12,76,000 3,19,000 9,57,000 IT 79,800 : 34,200 38,28,000 26,79,600 11,48,400 Total variable overhead costs apportioned (B) 51,04,000 29,98,600 21,05,400 Total overhead costs (A + B) 1,04,31,300 59,65,300 44,66,000 (ii) Step-down method of apportioning the costs of support departments over the operating departments (apportioning the finance department costs first) Items of cost Basis of apportionment Total (₹) Support Departments Operating Departments Finance (₹) IT (₹) MD (₹) DS (₹) Fixed overhead costs 53,27,300 22,96,800 30,30,500 Distribution of Finance Department 750:4,500:2,250 (22,96,800) 2,29,680 13,78,080 6,89,040 53,27,300 32,60,180 13,78,080 6,89,040 Distribution of IT Department 67,500: 75,000 (32,60,180) 15,44,296 17,15,884 Total fixed overhead costs apportioned (A) 53,27,300 29,22,376 24,04,924 Variable overhead costs 51,04,000 12,76,000 38,28,000 Distribution of Finance Department 1,200:1,200:3,600 (12,76,000) 2,55,200 2,55,200 7,65,600 51,04,000 40,83,200 2,55,200 7,65,600 Distribution of IT Department 79,800: 34,200 (40,83,200) 28,58,240 12,24,960 Total variable overhead costs apportioned (B) 51,04,000 31,13,440 19,90,560 Total overhead costs (A + B) 1,04,31,300 60,35,816 43,95,484 (iii) Reciprocal method (using simultaneous equation) of apportioning the costs of support departments over the operating departments Let F stand for Finance department expenses and T for IT department expenses. Then, for fixed overhead costs- F = 22,96,800 + 0.05T T = 30,30,500 + 0.10F Substituting the value of F, T = 30,30,500 + 0.10 (22,96,800 + 0.05T) = 30,30,500 + 2,29,680 + 0.005T = 32,60,180 + 0.005T T - 0.005T = 32,60,180 T = 32,60,180 0.995 = 32,76,563 Therefore, F = 22,96,800 + 0.05T = 22,96,800 + (0.05 x 32,76,563) = 24,60,628 Now, for Variable overhead costs- F = 12,76,000 + 0.05T T = 38,28,000 + 0.20F Substituting the value of F, T = 38,28,000 + 0.20 (12,76,000 + 0.05T) = 38,28,000 + 2,55,200 + 0.01T = 40,83,200 + 0.01T T - 0.01T = 40,83,200 T = 40,83,200 0.99 = 41,24,444 Therefore, F = 12,76,000 + 0.05T = 12,76,000 + (0.05 x 41,24,444) = 14,82,222 Items of cost Basis of apportionment Total (₹) Operating Departments MD (₹) DS (₹) Fixed overhead costs: Distribution of Finance Department (₹ 24,60,628) 60%, 30% 22,14,565 14,76,377 7,38,188 Distribution of IT Department (₹ 32,76,563) 45%, 50% 31,12,735 14,74,453 16,38,282 Total fixed overhead costs apportioned (A) 53,27,300 29,50,830 23,76,470 Variable overhead costs: Distribution of Finance Department (₹ 14,82,222) 20%, 60% 11,85,778 2,96,445 8,89,333 Distribution of IT Department (₹ 41,24,444) 66.5%, 28.5% 39,18,222 27,42,755 11,75,467 Total variable overhead costs apportioned (B) 51,04,000 30,39,200 20,64,800 Total overhead costs (A + B) 1,04,31,300 59,90,030 44,41,270

Topics: Overheads - Absorption Costing Method

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic