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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: Number of service calls Machine hours Asset value Maintenance 17 89 $200,000 $25,000 Security 20 88 $80,000 $42,500 Mining 60 182 $120,000 $160,000 Cutting 20 176 $480,000 $95,000 Department cost 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

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: Number of service calls Machine hours Asset value Maintenance 17 89 $200,000 $25,000 Security 20 88 $80,000 $42,500 Mining 60 182 $120,000 $160,000 Cutting 20 176 $480,000 $95,000 Department cost 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

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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: Number of service calls Machine hours Asset value Maintenance 17 89 $200,000 $25,000 Security 20 88 $80,000 $42,500 Mining 60 182 $120,000 $160,000 Cutting 20 176 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 $480,000 $95,000 Department cost 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 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.
Transcribed Image Text: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: Number of service calls Machine hours Asset value Maintenance 17 89 $200,000 $25,000 Security 20 88 $80,000 $42,500 Mining 60 182 $120,000 $160,000 Cutting 20 176 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 $480,000 $95,000 Department cost 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 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.
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 t most appropriate cost driver for Maintenance. Maintenance Department Particulars Maintenance cost 12,500✔ Maintenance cost allocation Security cost allocation Production activities total costs 190,000✔ 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 Department Security Mining Department Department Which of the following supports your answer? 7,500 ✓ $ 22,500✔ $ Cutting Department 7,500 ✓ 18,750 X 195,000 X Cutting Department 18,750✔$ 6,250 Security cost 21,250 X 21,250 X Production activities total cost 200,000 x122,500 x Is it viable for the company to choose the direct method of cost allocation? Yes 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.
Transcribed Image Text: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 t most appropriate cost driver for Maintenance. Maintenance Department Particulars Maintenance cost 12,500✔ Maintenance cost allocation Security cost allocation Production activities total costs 190,000✔ 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 Department Security Mining Department Department Which of the following supports your answer? 7,500 ✓ $ 22,500✔ $ Cutting Department 7,500 ✓ 18,750 X 195,000 X Cutting Department 18,750✔$ 6,250 Security cost 21,250 X 21,250 X Production activities total cost 200,000 x122,500 x Is it viable for the company to choose the direct method of cost allocation? Yes 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.
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