Question

support activity cost allocation for Jakes Gems

Coraded OievVOIR CtN etook Support activity cost allocation Jake's Gems mines and produces diamonds, rubies, and other gems. The gems are produced by way of the Miging 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: Mining Cutting Maintenance Security 20 60 20 Number of service calls 17 182 176 89 88 Machine hours $200,000 $300,000 $300,000 $80,000 Asset value $95,000 $42,500 $160,000 Department cost $25,000 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. 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, Cutting Security Mining Maintenance Department Department Department Department Previous Check My Work 2:17 SAMSUNG 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. Security Mining Cutting Maintenance Department Department Department Department Maintenance cost allocation Security cost allocation Production activities total costs 3. Assume Jake's Gems is considering cutting costs by switching to a simpler support activity cost allocation method. Determine the total costs allocated from each support activity to the other activities. Mining Cutting Particulars Department Department Maintenance cost Security cost Production activities total cost Is it viable for the company to choose the direct method of cost allocation? Which of the following supports your answer? a. The direct cost allocation method is too simple and it is not accurate. b. The difference between the direct cost allocation method and the reciprocal method is minimal and the direct method is easier. c. The reciprocal method of cost allocation is more accurate and easier than the direct method d. None of the above Previous Check My Work 2:18 SAMSUNG

Answer 1

Answer to Question 1

A. Number of Service Calls as they directly co-relate with the Maintenance Cost.

Answer to Question 2

Answer to Question 3

Maintenance Department Security Department Department Number of Service Cells % of Total Asset Value % of Total $ 25.00% Maintenance 200,000 20.00% 0.00% Security 20 60.00% $ 37.50% Mining Cutting 60 300,000 20.00% $ 37.50% 20 300,000 100.00% $ Total 100.00% 100 800,000 Security Cutting Mining Maintenance Cost Maintenace Cost Allocation 25,000 5,000.00 15,000.00 5,000.00 15,937.50 $ 30,937.50 $ Security Cost Allocation $ 42,500 $ 10,625.00 15,937.50 Production Activities Total Cost 20,937.50

Maintenance Department Security Department % of Total Machine Hours % of Total Asset Value Department Mining 50.84% S 50,00% 182 300,000 49.16% $ 100.00% $ 50.00% Cutting 176 300,000 Total 100,00% 358 600,000 Cutting 12,709.50 $ 21,250.00 $ 33,959.50 $ Mining Cost 25,000 $ 42,500 $ $ $ Maintenace Cost Allocation 12,290.50 21,250.00 Security Cost Allocation Production Activities Total Cost 33,540.50

No it is not viable for the Company to choose the direct method of cost allocation as it is not accurate as compared to the reciprocal method. i.e. Option A