Page 78 - BA2 Integrated Workbook STUDENT 2018

Chapter 4

5.2 Equation method

The other option for calculating the total overhead in each production department is
the equation method which involves using algebraic equations. Whichever you
choose you should arrive at the same answer.

Note: For this section some basic algebra is required. Many students will have
studied this previously, but may want to recap the basics. See the section at the end
of chapter 4 in the textbook for some practice in dealing with algebraic equations.

Using the same example as in the repeated distribution method:

We can produce equations to show the total overheads of the two service
departments:

S1 = 21,000 + 0.05S2

S2 = 15,000 + 0.1S1

Substitute one formula into the other to calculate the unknowns. (Either formula can
be used).

S1 = 21,000 + (0.05 × (15,000 + 0.1S1)

Now we only have one unknown (S1) which can be solved.

Remove the brackets:

S1 = 21,000 + 750 + 0.005S1

This can be rearranged and solved for S1:

S1 − 0.005S1 = 21,000 + 750

0.995S1 = 21,750

S1 = 21,859

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