Question

eBook Calculator E Print Item Support activity cost allocation Jake's Gems mines and produces diamonds, rubies, and other gems. The gems are produced by way of the Mining and Cutting activities. These production activities are supported by the Maintenance and Security activities. Security costs are allocated to the production activities based on asset value. Maintenance costs are normally allocated based on machine hours. However, Maintenance costs typically correlate more with the number of service calls. Information regarding the activities is provided in the following table: Maintenance Security Mining Cutting Number of service calls 60 Machine hours 88 182 176 Asset value $200,000 $80,000 $300,000 $300,000 Department cost $25,000 $42,500 $160,000 $95,000 1. Is the process of allocating maintenance costs based on machine hours correct? Identify the measure than can possibly be used to allocate the maintenance costs. 20 20 No Measures that can possibly be used to allocate the maintenance costs. a. Number of service calls b. Asset value c. Department cost d. None of the above 2. Based on your response to part (1), determine the total costs allocated from each support activity to the other activities using the reciprocal services method and the most appropriate cost driver for Maintenance

Answer 1

The above question is based on Activity Based Costing method. All the 3 question is answered as per the given situation.

Activity based costing is an accounting methodology that a gas Cost to activities rather than product & services. This enables resources and overhead cost to be more accurately assigned to products and services that consume them. In the given question, Maintenance cost is allocated on the basis of machine hours but it related more with the number of service calls. the 8o, as per Activity based costing approach a Maintenance cost should be allocated on basis of number of service calls. Answer = (a) - Number of service calls.

Mountenance Department security Department mining cutting e Department Departmente 5000 15000 5000 (B) security cost will be allocated between. maintenance mir and rering cutting department on the basis of Asset (1) Mining and cutting are already allocated on the basis produchon - Maintense cost allocation (A) 10625 15937.5 15937:56 Security cost I allocation (B) 160000 95000 Production activities total cost (4) Total 10625 5000 190937515931-5 (4) Maintence cast = $25000 It will be allocated on the number of service calls between security, mining and cutting department . i.e. for security = $25000 x 20 sowice calls 20160+20 - $5000, (utewise for others)

Mining Cutting Department Department Maintenance cost 18750 6250 In point (a) = It is said that the direct cost allocation method is not accurate and if the said method isn't accurate, at can't be viable for the company to choose . In point (c) = In this point, it is said that reciprocal method is more actrate and easy than direct method which is not correct as per the asked question. security cost 21250 21250 16000 95000 Production activitas total cost Toto 200000 12250 - Answer for the given question is Point (6) because the difference between the direct cost allocation method and the reciprocal method is minimal in ein in Mining Department difference is $ 19062.5 and in a cutting department is $ 6562.5$ ..