Professional Documents
Culture Documents
Prashant Shukla
BASE
No .of employees
No. of workers
Labour wages/ No. of employees
Capital value/ Machine hours
Lanours hours spent/ No. of
machines
Floor area
Cubic content
Horse power
Wattage
Weight or value of materials
Volume
Total hours
Mileage/ tonnage/packages/No. of
trips
No. of bills
S1
S2
S3
0
10
10
50
30
60
10
0
0
40
50
80
20
30
0
30
20
120
400
800
1000
(Proportion %)
As per above data, S1 provides services not only to production departments P 1 and P2 directly
but also to service departments S2 and S3. S1 also receives services from S2 and S3.
That is to say, services are given not only to production departments directly but are also
1. Direct Method
In this method it is assumed that services are rendered only to production departments
directly and none to any other service departments. Should there be exchanges of
services between service departments, these are simply ignored. The allocation
proportions are then recomputed to total to 100% deleting the proportions allocated to
service departments. These allocations can be calculated easily.
Deleting the allocations of services to service departments in the above example, the
proportions of service rendered directly to the two production departments will be recomputed as:
From the original table we have deleted the allocation proportion to all other
service departments, leaving only the proportions to P1 and P2, and then recomputed the
proportions to total to 100% For e.g. Proportion from S 1 will be P1 = 50% and P2 = 30%
totaling only 80%. Thus the revised proportion of services from S 1 directly to P1 and P2
will be 50/80 = 62.5% and 30/80 = 37.5% similarly computations are done for other service
departments.
S1
S2
S3
P1
P2
S1
0
0
0
62.5
37.5
S2
0
0
0
44.4
55.6
S3
0
0
0
60.0
40.0
Revised
Proportions
The allocations of variable costs by the direct method are easily calculated as:
To P1: 0.625 (60) + 0.444(80)+ 0.60(120) =145
To P2: 0.375 (60) + 0.556(80)+ 0.40(120) =115
Observe that the total allocated costs tally with the specified total of 260.
You will observe that while this method is easy to apply, the method does not reflect the
true state of exchanges of service between service departments.
S1
S2
S1
20
S2
30
11.1
S3
P1
30
55.6
44.4
P2
20
33.3
55.6
From
To
*
Proportions
%
Note:
At the top of the table the departments are fisted as per order decided. ii) that certain
proportions of backward flow have been deleted indicated by a star (*) and after
deletion the remaining proportions have been re-computed to total 100%
In the first pass, cost of S 3 is charged out. It gives 24 (20% of 120) to S 1 and 36 (30%
of 120) to S2 and similarly to P1 and P2. Once this is done, then S3 is deleted from
consideration. The next service department listed is S 1. The cost to be allocated now
is 84 (60 specified as that of S1 and 24 allocated from S3. In the second pass this total
cost of 84 will be charged out as per the revised proportions.
S1 gives 9.3 to S2 and balance direct to P1 and P2.
In the last pass, the accumulated cost of 80+36+9.3 = 125.3 of S 2 will be carried over
to the remaining departments P1 and P2. These calculations are shown in the table.
S1
S2
S3
P1
P2
Costs as
given
S3
24
36
(120)
36.0
24.0
120
S1
(84)
9.3
0
46.7
28.0
60
S2
0
(125.3)
0
55.6
69.7
80
=138.3
=121.7
260.0
Check the accuracy of computations by tallying the ultimate total of costs allocated
to production departments with the total of the costs specified for the service
departments.
X1
X2
X3
60
80
120
Or as (I -A) X = b
The solution to such simultaneous equations (in real problems there will be many such
equations) is obtained by inverting the matrix of the coefficients. The solution for X can
be expressed as:
X = (I-A)-1 b
That is, by pre-multiplying b by (I - A)-1 the inverse of the coefficient matrix.
1
0.967
0.23
0.32
0.99
60
80
120
98.862
128.852
129.886
The adjusted costs of the services are as given in the last column. Note that at this
stage, the total of the adjusted cost does not tally with the total costs as specified.
This apparent anomaly will disappear during the carry over of adjusted costs to
the production departments.
Now the next step is to carry over the adjusted costs to the production
departments. This again is done as a matrix multiplication:
98.862
Z1
0.5
0.4 0.3
0.3
0.5 0.2
=
Z2
139.938
128.852
=
120.062
129.886
Truth the allocated service costs to P1 is Rs. 139,938 and to P2 is Rs. 120,062.
Note that the total of these tally with Rs. 260,000 which is same as the total of the
costs specified (60 + 80 + 120 = 260 thousand)
Special Feature of the Matrix Method
In addition to providing a correct method of allocating service cost under
reciprocal exchange of services, the method has some additional features:
The adjusted costs Xj give the effective cost of service department. Dividing this
by the number of units of service the correct unit cost can be computed. This
information will be very useful in comparing own costs against external costs of
the service.
In the event of dose down of a service center the number of units of service that
should be acquired externally can be easily determined. This is calculated by
dividing the number of units produced internally by the diagonal element of the
concerned service in the inverse of the matrix (I - A).
We will present another example to demonstrate these features:
For example consider a textile mill located in a backward area, which has its own
internal service departments for supply of water (S\V), Steam (SS) and Power
(SP).
SW
SS
SP
0
50
0
30
20
30
0
0
40
25
35
120
20
0
0
35
45
150
To
SW
SS
SP
PS
PW
Variable
Costs
(Rs.000)
Water consumption is 600,000 litres, Steam 240,000 cubic metres and Power 500,000 Kwh.
The matrix equation to be solved will be:
1
0
-0.5 1
0 -0.4
-0.2
0
1
X1
X2
X3
30
120
150
1
0.96
1 0.08 0.2 30
0.5
1 0.1 120 =
1 150
0.2 0.4
72.50
156.25
212.50
156.25
=
164.813
212.50
Thus the allocation costs are: To Spinning PS = Rs. 135,187 and to weaving
PW = Rs. 164,813 totaling 300,000 tallying with the total service cost specified.
Rs
150,000
48,000
6,000
Total Savings
204,000
The cost of buying 480,000 kWh of power at a price of 35 paise will amount to Rs.
168,000.Comparing this with the cost savings of Rs. 204,000 there will be net savings of
Rs. 36,000 to the mill. Hence, the mill should close down the power department and buy
power from the external agency at a price of 35 paise/kWh.
In the above example we have traced the savings and the power to be bought by a round
about analysis of cause - effect reasoning.
Even in this simple example where the number of service departments and the
interactions are few the computations have been enormous. For a real-life problem
with a larger number of service departments and complex interactions between the
departments this type of cause - effect analysis will be very difficult and almost
S1
10%
20
0
40
30
120
Source of Services
S2
10
0
20
30
40
160
S3
0
30
10
25
35
200
1600
2400
2600
a. Compute the service costs after reciprocal exchanges and compute the allocations to the two
production departments.
b. An external agency offers the services of S1 at a unit price of Rs. 80/- and services S2 at
a unit price of Rs. 100. Would it be worthwhile availing of these offers? If only one of the services
can be purchased which would Variable costs can be saved if a service department is closed down.
Note: The required inverse matrix is given below:
1
0.738
0.84 0.09
0.03
0.18
0.27
0. 04
0.81
0.18
0.88
S2
20%
0
30%
25%
25%
170
S3
10%
20%
0
50%
20%
230
S1
S2
S3
P1
P2
Variables cost Rs.
`000
Unit of service
2000
2500
3000
a. Find the adjusted costs of the service departments and the total cost of allocations to
each of the production departments.
b. An external agency can offer the services of S2 at a unit price of Rs. 70/- and of S3 at a
unit price of Rs. 95. Would it be worthwhile to by these services externally?
The factory cannot close down both S 2 and S3 as this will lead to labour problems. Thus
if only one of the two departments can be closed down, determine which should be
closed and the saving the workshop will derive
Note: The inverse of the required matrix given below may be used in calculations.
1
0.818
0.94
0.04
0.20
0.23
0.88
0.31
0.14
0.18
0.90
Sl
S2
S3
P1
P2
Variables cost Rs.
`000
Fixed cost
Units
S1
10%
-20%
40%
30%
80
S2
-10%
40%
20%
30%
100
S3
20%
--50%
30%
120
60
3000
80
2000
100
4000
a. Develop the equations from which the reciprocally adjusted costs can be allocated to
the production department.
b. Compute the allocated costs to the production departments, separately for the variable
and fixed parts.
c. For technical reasons it is decided to close down the service department S3 and
purchase the required services externally. What should be the maximum price that can
be offered so as not to incur any more cost than now and how many units of this service
will have to be bought?
Note: The required inverse matrix is given below
1
0.774
0.90
0.00
0.18
0.08
0.86
0.36
0.18
0.00
0.81
S2
S3
10%
-20%
30%
40%
800
10%
-15%
50%
25%
1000
15%
10%
-45%
30%
1200
5000
6000
8000
a .Develop an appropriate matrix equation that will enable computation of the adjusted
costs of the services.
b. Using the data given above, compute the adjusted costs of the services and the
allocated costs to each of the production departments. (Show the figures of allocations
from the each services and the total).
c. An external agency offers the services of S2 and S3 at unit prices. of Rs. 160/- and Rs.
180/- which offer will be more beneficial and the annual savings there from.
d. After computing the allocations a revision had to be made on the output levels of two
production departments - PI output to be increased by .20% and P2 output to be decreased
by 20%. Determine how many units of the services SI, S2, S3 will be needed to support this
revised activity level.
Note: The inverse of the relevant matrix given below may be used in your computations.
1
0.8545
0.985
0.020
0.200
0.1225 0.16
0.87
0.09
0.155
0.09
S1
10%
25
15
30%
20
80
2000
S2
20
20
20
40
100
3000
S3
10
5
50
35
120
6000
a. Compute the reciprocally adjusted costs of the services and the allocated costs to the operating
departments.
b.An external agency is prepared to offer the service currently produces by S3 at a unit price of
Rs.25. should the firm avail of this offer and close down the service department S3 ? If so, how
many units of service will have to be purchased externally and how much savings can be
achieved?
Note: The inverse of the matrix required in the computation is given below for ready use:
1
0.7865
0.93
0.19 0.02
0.2525 0.855 0.09
0.20
0.21 0.85
6. A factory has three service departments S1, S2, and S3 giving services to three production
departments O1, O2 and O3.For a budgeted period the following services have been provided:
To
From
S1
S2
S3
S1
S2
S3
O1
O2
O3
Total
0
20
110
0
0
90
0
30
0
20
70
350
40
50
250
0
60
0
60
230
800
The variable costs of the service departments for the same period are:
S1=Rs.40000
S2=Rs.80000
S3=Rs.30000
7. A cotton mill has its own internal service departments for supply of water (S,), steam (S),
and power (S,). A portion of water is converted into steam using own power and a
portion of steam is used to generate steam is used to generate steam. The service
departments render services to two production departments, i.e. spinning (P) and weaving
(P).
The proportions of service exchanges, the variable costs and the number of units of services
are given below:
From
To
S1
S2
S3
P1
P2
Variable costs ('000)
S1
10%
25
15
30%
20
60
S2
20
0
20
20
40
120
S3
0
10
5
50
35
160
Water consumption is 8,00,000 liters, steam 3,00,000 cubic meters and power 6,00,000 kwh.
a.. Determine the allocated costs to production departments.
b. If an external agency can supply power at a cost of 30 p/ kWh, should the mill buy it?
c.If the mill buys it, what amount of power it will buy.
d. Find also the cost/unit of water and steam.
8. The following transition matrix T shows that brand 1 retains 70% of its
customers but loses 30% to brand 2; brand 2 retains 80% of its customers and
loses 20% of its customers to brand 1.
T=
0.70 0.30
0.20 0.80
These are the only two brands available in the market. During the last period brand I had
30% and brand 2 had 70% in the market. Find the expected market shares in the next
period.
P1
3000
3070
60000
60
10
2000
P2
2000
4475
80000
30
15
2500
P3
3000
2419
100000
50
20
3000
S1
1500
-5000
10
10
2000
S2
195
-5000
-5
500
The following figures extracted from the accounting records are relevant.
Rs.
5000
600
1939
1500
10000
9695
S1
S2
P1
20%
40%
P2
30%
20%
P3
40%
30%
S1
-10%
S2
10%
--
You are required to calculate the overhead absorption rate per hour in respect of the three
production departments using matrix method.
Find out the total cost of product X which is processed for manufacture in departments P1,
P2, and P3 for 4,5 and 3 hours respectively, given that its direct material cost is Rs.50 and
direct labour cost Rs.30.
Service provided to
S1
S2
P1
P2
S1
10%
40%
50%
S2
20%
50%
30%
Total estimated
Overhead
costs(Rs-)
9000
4000
3500
3000
The
variable
S1
S2
S3
P1
P2
P3
Total
0
0.08
0.15
0
0
0.10
0
0.12
0
0.20
0.32
0.45
0.80
0.24
0.30
0
0.24
0
1.00
1.00
1.00
the
budgeted
costs
of
the
service
departments
for
period
are:
12. A company has three Production Departments A, B and C and two Service
Departments X and Y. The expenses incurred by them during a month are:
A
B
C
X
Y
Rs. 80,000
Rs. 70,000
Rs.50,000
Rs.23,400
Rs. 30,000
A
20%
40%
B
40%
20%
C
30%
20%
X
-20%
Y
10%
--
Show clearly using matrix method how the expenses of X and Y Departments would be
apportioned to A, B and C Departments.
Material
handling
Inspection
Matching%
Finishing%
Assembly%
Handling%
30
25
35
Inspection
%
10
20
30
45
You are required to calculate the charge for overhead to each of the three production
cost centres, including the amount reapportioned from the two service centres, using
matrix method.
14.The new Enterprises Ltd. has three Production Departments A, B and C and two
service departments D & E . The following figures are extracted from the records of
the company.
Rs.
5000
600
1500
1500
10000
10000
B
2500
15
2000
30
80000
C
3000
20
3000
50
100000
D
2000
10
1500
10
5000
E
500
5
500
-5000
4028
4066
--
--
C
40%
30%
D
-10%
E
10%
--
You are required to calculate the overhead absorption rate per hour in respect of the three
production departments using matrix method.
What is the total cost of an article if its raw material cost is Rs. 50, labour cost is Rs. 30 and
it passes through Departments A,B,and C for 4,5 and 3 hours respectively.
15. The space Production Company manufactures components for radio and television
satellites using two service departments and two service departments. The interdepartmental relations and estimated overhead costs are given below.
From
Total
overhead
costs (Rs.)
Assembly
50%
30%
276000
Required:
a. Using the direct method, shoe the amount of scheduling Department costs to be allocated
to Assembly Department.
b. Repeat (i) using the step method and allocating the maintenance first.
c. Repeat (i) using matrix method.
Overhead costs
aloocated (Rs.)
A
B
C
X
Y
80000
40000
20000
20000
10000
You are required to find the final overhead costs of each of the production departments including
reappointed cost of service centres using matrix method.