Specific Order of Closing Method

Specific order of closing method (also known as sequential method) is one of the techniques used to reallocate service departments' overheads to production departments. As the name suggests, it reallocates service department overheads in certain order.

Under specific order of closing method, we reallocate the overheads of the largest service department first and then the overheads of the second largest service department and so on. The overheads of service departments are reallocated to production departments as well as other service departments but once the overheads of a service department are reallocated, it does not receive any reallocations back from other service departments. In this way, the balances in service departments reach zero in fewer steps than the repeated distribution method.

There is a major drawback however. Since there are no reallocations back, the service department overheads are not apportioned among service departments accurately according to the specified percentages.

The following example illustrates the specific order of closing method:

Example

γ ltd. has three production departments (P, Q and R) and two service departments (X and Y). The overheads before reallocation are given below:

DepartmentOverheads
P$35,000
Q$64,000
R$19,000
X$22,000
Y$38,000

The reallocation percentages of the service departments' costs are given below:

DepartmentPQRXY
X20%25%25%10%
Y25%30%30%15%

Use the specific order of closing method to reallocation the service department costs to

Solution

Since service department Y has large overheads than department X therefore we will reallocate department Y costs first to all production departments and service department X. Then we will reallocate department X costs only to production departments because in specific order of closing method we don't allocate costs back to a service department whose costs have already been reallocated. To transfer all the costs of service department X, we apportion department X costs of $27,700 after reallocation of department Y's cost among the three production departments in the ratio existing between their percentages from department X.

Thus, department P will get 40%/90% × $27,700 and department Q and R will get 25%/90% × $27,700 each.

Department P Q R X Y
Allocated Overheads 35,000 64,000 19,000 22,000 38,000
Dept. Y Reallocation 9,500 11,400 11,400 5,700 (38,800)
Total 44,500 75,400 30,400 27,700 0
Dept. X Reallocation 12,311 7,694 7,694 (27,700)
Total 56,811 83,094 38,094 0

Written by Irfanullah Jan