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Support activity cost allocation

Jakes 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	60	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 Department	Security Department	Mining Department	Cutting Department
Maintenance cost allocation		$	$	$
Security cost allocation	$		$	$
Production activities total costs			$	$

3. Assume Jakes 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.

Particulars	Mining Department	Cutting Department
Maintenance cost	$18750	$6250
Security cost	$21250	$21250
Production activities total cost	$	$

Is it viable for the company to choose the direct method of cost allocation?

Yes

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.

b

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