Question

Support activity cost allocation 60 20 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 17 20 Machine hours 89 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. 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 a 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. Maintenance Security Mining Cutting narartment Nantmant nanamant nanamant

Answer 1

Solution:
1	No, the process of allocating maintenance cost based on machine hours is not correct
	Number of Service cells could be possibly used to allocate the maintenance cost.
2		Maintenance Department	Security Department	Mining Department	Cutting Department
	Particulars
	Maintenance cost allocation	$                        3,632	$               4,274	$                12,821	$                4,274
	Security cost allocation	$                        9,659	$               3,864	$                14,489	$              14,489
	Production Activities Total cost			$              160,000	$              95,000
		Maintenance Department	Security Department	Mining Department	Cutting Department
						Total
	Number of serivce cells	17	20	60	20	117
	Asset Value	$                   200,000	$             80,000	$              300,000	$           300,000	$      880,000
	Department Cost	$                      25,000	$             42,500	$              160,000	$              95,000	$      322,500
3		Mining Department	Cutting Department
	Particulars
	Maintenance cost allocation	$                      18,750	$               6,250
	Security cost allocation	$                      21,250	$             21,250
	Production Activities Total cost	$                   160,000	$             95,000
		Mining Department	Cutting Department
				Total
	Number of serivce cells	60	20	80
	Asset Value	$                   300,000	$           300,000	$             600,000
		Maintenance Department	Security Department
				Total
	Department Cost	$                      25,000	$             42,500	$                67,500
	Yes, It is viable for the company to choose direct cost allocation method.