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:

1. Should Maintenance costs continue to be allocated based on machine hours? Why would a different driver be more appropriate?

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 allocation 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.

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