26357 Management Accounting

Cost Allocation exercise -

Polygon Gasses
Dr Hadiza Said

Polygon Gasses Total Direct Costs and Total Support Costs

Departments Costs
000s

PRODUCTION SUPPORT

PR Gaz R PR Gaz U HSE TR OTH

8250 3750 3000 4500 2500 10000 22000 12000

TOTAL COSTS

Additional Question 1 Polygon Gasses Single Pool Allocated to two production depts on
basis of relative production of two gasses PR
Gaz R 000s

PU
Gaz U 000s

Direct costs Pool

75% x 10,000

8250 7500 15750

3750 2500 6250 0.25

6250/25,000 25% x 10,000

Per m3

15750/75,000

0.21

Remember !!! Direct Method

Service Department (Cafeteria) Operating Department (Machining)

Cost of services between service departments are ignored and all costs are allocated directly to operating departments.

Service Department (Custodial)

Operating Department (Assembly)

Additional Question 1 Polygon Gasses Direct Method Allocated to two production depts
on basis of 3 separate pools & no reciprocal services PR
Gaz R 000s

PU
Gaz U 000s

Direct costs HSE TR OTH Per m3

20/90 x 3,000

8250 667 2250 1944 13111

13111/75,000

3750 2333 2250 556 8889 0.36

8889/25,000
70/90 x 3,000

5/10 x 4,500

5/10 x 4,500

70/90 x 2,500

20/90 x 2,500

0.17

Remember!!!

Step Method
Operating Department (Machining)

Service Department (Cafeteria)

Service department costs are allocated to other service and operating departments.

Service Department (Custodial)

Operating Department (Assembly)

Polygon Gasses Step Down Method Allocated to two production

depts on basis of 3 separate pools & reciprocal services PR
Gaz R 000s

PU
Gaz U 000s

HSE
000s

OTH
000s

Direct costs TR HSE OTH Per m3

70/90 x (2500 + 225 + 359)

8250 225
5% x 4,500

3750
5% x 4,500

225

1437
20/95 x (3,000 + 3825)

85% x 4,500

3825

5% x 4,500

225

5029
70/95 x (3,000 + 3825)

359

2399 12311 0.16

5/95 x (3,000 + 3825)

685 9689 0.39

20/90 x (2500 + 225 + 359)

12311/75,000

9689/25,000

Polygon Gasses Part C

Why are the answers to the three calculations different?
The results are different because of the relative usage of the overheads The use of a single pool with an absorption rate based on volumes of production assumes each cubic metre requires the same amount of support which is clearly not the case in this example If one compares the direct method to the step down method, the issue is the very high usage of training to support HSE which in turn is being used in very different proportion between the two products (the direct method allocates training equally between the two productive depts.

Polygon Gasses Part D

Evaluate the proposal to move from a single pool to 3 pools in association with the step down method
The arguments in support of single pool centre around simplicity and an acknowledgement that indirect costs rise because it is impossible/impractical to identify a causal link between changes in activity and changes in costs. Given the figures on relative usage it may well be that there is some causal link but if the total level of these costs really is fixed then a single pool may be acceptable. If there is a causal link then clearly the two gasses are very different and it seems appropriate for this to be reflected in the numbers which emerge from the costing system. It seems that the current pricing system is leading to increasing sales of products which may be loss making.