Accounting Assignment Help With Secondary Distribution

6.2.2 Secondary Distribution

It is a process of redistribution of service departments’ costs into production departments. Secondary distribution may be done in the following ways:

1) Ignoring service reciprocity and,

2) Considering service reciprocity

Service reciprocity means one service department uses the service of the other service and also provides service to that department. Stores department uses service of repairs and maintenance department for maintenance of materials handling equipment. On the other hand, repairs and maintenance department uses services of the stores department for the purchase of spares.

a) S1 purchases spares for S2

b) S2 upkeeps stores equipment

Fig: Service reciprocity

Allocation base for the secondary distribution my be as follows:

Stores No. of Stores requisition

Repairs and maintenance No. of Repairs requisition

Labour welfare No. of Employees

Example:

Cost incidence of various department of a factory are as follows:

Production Deptts. Service Deptts.

( $ in lacs) P1 P2 S1 S2 S3

Raw Materials 20 18 -4 -

Wages 10 6 2 2 1.5

Direct materials 4 2 1.2 1.4 1.2

Manufacturing over-

Head Department 1.2 2.2

P1 P2 S1 S2 S3

Floor space occupied (%) 40 40 10 5 5

Meter reading (%) 30 30 15 15 10

Water (%) 45 45 1 1 8

Telephone (%) 15 15 50 10 10

No. of Stores requisition 1000 800 200

No. of Repairs requisition 200 100 50

No. of Employees 500 400 100 80 80

Let us make secondary distribution.

Solution:

P1 P2 S1 S2 S3 Total

$ $ $ $ $

The above distribution has been done ignoring service reciprocity.

Now let us have a look into the costs of the production departments.

P1 P2

$

Prime cost 3,400,000 2,600,000

In case reciprocity is recognised, the secondary distribution should be done after determining effective cost of S1 & S2. This requires setting of two simultaneous equation.

S1 = 641,167 + 1/7 S2 ( eq. 1)

S2 = 627,333 + 1/10 S1 ( eq. 2)

( eq. 1 x 1/10) 1/10 S1 = 64,117 + 1/70 S2 ( eq. 1A)

-1/10 S1 = 627,333 - S2 ( rearranging eq. 2)

( Eq. 1A + 2) 0 = 691,450 - 69/70 S2

S2 = (691,450 x 70) / 69

= 701,471

S1 = 641,167 + 1/7 x 701,471

= 641,167 + 100,210

= 741,377

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