Question

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 17 2060 20 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 89 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.

Answer 1

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Jake's Gems
Answer 2
Reciprocal Method	Maintenance	Security	Mining	Cutting	Total
Number of Service Calls	17.00	20.00	60.00	20.00	117.00
Machine hours	89.00	88.00	182.00	176.00	535.00
Asset Value	200,000.00	80,000.00	300,000.00	300,000.00	880,000.00
Number of Service Calls %		20.00%	60.00%	20.00%	100.00%
Asset Value %	25.00%		37.50%	37.50%	100.00%
Department Cost	25,000.00	42,500.00	160,000.00	95,000.00	322,500.00

Let Overhead cost of maintenance department is $ X and Overhead cost of Security department is $ Y
So, X= 25000+ 25% of Y	Equation 1
Y= 42500+ 20% of X	Equation 2
Or, X= 25000+ 0.25Y
Y= 42500+ 0.20X

Substituting the value of X in equation 2:

Y = 42,500 + 0.20(25,000 + 0.25Y)

Y = 42,500 + 5,000+.05

Y – 0.05 = 47,500

0.95Y = 47,500

Y = 47,500/0.95

Y = $ 50,000.

Total Overhead cost of Security department is $ 50,000.

Substituting the value of Y in equation 1:

X= 25,000+ 25% of Y

X= 25,000+ 25%*50,000

X= 25,000+ 12,500

X= 37,500

Total Overhead cost of Maintenance department is $ 37,500.

Allocation Summary
Reciprocal Allocation Method	Maintenance	Security	Mining	Cutting	Total
Number of Service Calls %		20.00%	60.00%	20.00%	100.00%
Asset Value %	25.00%		37.50%	37.50%	100.00%
Department Cost	25,000.00	42,500.00	160,000.00	95,000.00	322,500.00
Allocation
Allocation of Maintenance costs (20:60:20)	(37,500.00)	7,500.00	22,500.00	7,500.00	-
Allocation of Security costs (25:37.50:37.50)	12,500.00	(50,000.00)	18,750.00	18,750.00	-
Department Cost	-	-	201,250.00	121,250.00	322,500.00

Answer 3
Particulars	Mining	Cutting	Total
Maintenance	18,750.00	6,250.00	25,000.00
Security	21,250.00	21,250.00	42,500.00
Own Department Cost	160,000.00	95,000.00	255,000.00
Total Cost	200,000.00	122,500.00	322,500.00