PR 5-2A Support activity cost allocation Obj. 3 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 Mainte- nance 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 $120,000 $480,000 Department cost $25,000 $42,500 $160,000 $95,000 Instructions 1. Should Maintenance costs continue to be allocated based on machine hours? Why would a different driver be more appropriate? Chapter 5 Support Department and Joint Cost Allocation 241 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. 3. Jake's Gems is considering cutting costs by switching to a simpler support activity cost alloca- tion method. Using the information provided and given your response to part (2), determine if switching to the direct method would significantly alter the production activity costs. RR 520 Taistot allocation OL