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8/12/2019 Class+Exercise+Solutions

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26357 Management Accounting

Cost Allocation exercise -

Polygon Gasses

Dr Hadiza Sa’id



Total Direct Costs and Total Support Costs

Polygon Gasses

Departments Costs

PRODUCTION PR–

Gaz R 825012000

3000

4500

2500 10000

22000

3750

£000s

PR – Gaz U

SUPPORT HSE

TR

OTH

TOTAL COSTS



Additional Question 1 – Polygon Gasses

Single Pool–

Allocated to two production depts on basis of relative production of two gasses

PRGaz R

Direct costs

Pool

Per m3

PUGaz U

£000s £000s

8250 3750

7500 2500

15750

0.21

6250

0.25

75% x 10,000 25% x 10,000

15750/75,000 6250/25,000



Remember !!! Direct Method

Service

Department

(Cafeteria)

Service

Department

(Custodial)

Operating

Department

(Machining)

Operating

Department(Assembly)

Cost of services

between service

departments are

ignored and all

costs are

allocated directly

to operating

departments.



Additional Question 1 – Polygon Gasses

Direct Method–

Allocated to two production deptson basis of 3 separate pools & no reciprocal services

PRGaz R

Direct costs

HSE

Per m3

PUGaz U

£000s £000s

8250 3750

667 2333

2250

0.17

2250

0.36

20/90 x 3,000 70/90 x 3,000

5/10 x 4,500 5/10 x 4,500TR

OTH 70/90 x 2,500 20/90 x 2,5001944 556

13111

13111/75,000 8889/25,000

8889



Remember!!! Step Method

Operating

Department

(Machining)

Operating

Department(Assembly)

Service department

costs are allocatedto other service

and operating

departments.

Service

Department

(Cafeteria)

Service

Department

(Custodial)



Polygon Gasses

Step Down Method–

Allocated to two productiondepts on basis of 3 separate pools & reciprocal services

PRGaz R

Direct costs

TR

Per m3

PUGaz U

£000s £000s

8250 3750

225225

1437

0.16

5029

0.39

5% x 4,500 5% x 4,500

20/95 x (3,000 + 3825)

HSE

OTH 70/90 x (2500 + 225 + 359) 2399 685

12311

12311/75,000 9689/25,000

9689

HSE OTH

£000s £000s

3825225

35985% x 4,500 5% x 4,500

70/95 x (3,000 + 3825) 5/95 x (3,000 + 3825

20/90 x (2500 + 225 + 359)



Polygon Gasses – Part C

Why are the answers to the three calculationsdifferent?

• The results are different because of the relative usageof the overheads

• The use of a single pool with an absorption rate basedon volumes of production assumes each cubic metrerequires the same amount of support which is clearlynot the case in this example•

If one compares the direct method to the step downmethod, the issue is the very high usage of trainingto support HSE which in turn is being used in verydifferent proportion between the two products (thedirect 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 aroundsimplicity 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 thatthere is some causal link but if the total level of these costsreally 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 bereflected in the numbers which emerge from the costingsystem.• It seems that the current pricing system is leading to

increasing sales of products which may be loss making.

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