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: 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 1. Is the process of allocating maintenance costs based on machine hours correct? Identify the measure than can possibly be use 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 1. 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 Security Mining Cutting . Department Department Department Department Maintenance cost allocation $ Security cost allocation $ LA 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 18,750 6,250 $ $ Security cost 8,500 34,000 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. h The difference hotwoon the dirart rect allocation method and the rorimmoral method is minimal and the dirart method is asciord. None of the above. Feedback Check My Work There are three commonly used methods for allocating support department costs to production departments: the direct method, the reciprocal services method, and the sequential method. The total costs allocated to the departments will be different depending on which of the three support department allocation methods is used. The direct method allocates all support department costs directly to production departments. The sequential method considers some inter-support- department services.ForestLand Wood Products manufactures lumber and wood components. The company has two main product lines: Hardwood an: Softwood. Hardwoods are used for flooring, cabinetry, paneling, doors and trimwork. Softwoods are used for wall studs, joists, planks, rafters, beams, stringers, posts, decking, subflooring and concrete forms. ForestLand also sells a byproduct, wood shavings and saw dust. Shavings are purchased for farm and industrial use as well as for further processing into wood pellets anc fiber board. The revenue is allocated to each product line based on the percentage of thousand board feet produced by the product line. Your accounting firm has been retained by ForestLand for three years. You have been assigned to properly allocate support department costs. Your manager wants the allocation to be as accurate as possible and has instructed you to use the reciprocal services method. She reminds you that revenue from byproducts are used to offset costs. You begin your research and learn that there are four production departments: log yard, milling, drying, and packaging. The Hardwood iine produces 300 thousand board feet of product while the Softwood produces 900 thousand board feet. The milling department direct costs, direct labor and overhead per thousand board feet for Hardwood is two times that of Softwood. You hav been instructed to use the weighted average method to allocate the costs in the milling department between the two product lines. The remaining department costs are the same for both product lines, per thousand board feet. There are two support departments: maintenance and administration. The maintenance department is responsible for maintalnln all equipment and janitorial duties. Because the equipment is used more extensively for hardwoods, the department cost driver i hours worked. The administration department includes the company president and his staff. Their duties include accounting, human resources, and information technology. The cost driver for the administration department is number of employees. In your first step, you determine the costs traced to each department and the usage of the support department cost drivers. You have created the foliowing table: Maintenance Administration Log Yard Milling Drying Packaging Hours worked 11,000 8,100 9,720 21,060 16,200 25,920 Number of employees 6 4 4 12 8 10 Department costs $212,960 - $261,690 $375,045 $767,400 $524,095 $271,040 Your next step is to determine the proportional usage of each support department's cost driver by the other departments to whic its costs are to be allocated. Complete the following tables. Maintenance Department ._ "u ' Usage Percent I ';' L'/o Log Yard Milling Drying Packaging Totals % Administration Department 5 ' H Usage Percent " 0/0 Log Yard Milling Drying Darkaoina lULUID IU m Using the cells below, create the formulas that will simultaneously allocate support department costs among the departments. \"IV represents Maintenance and "A" represents Administration. Wm\"... H . ,. .....v) Solve the equations, If required round any decimal to three places in your computations. For example, .0183 would be rounded t _018. Round your final answer to the nearest dollar. M=$ A=$ Use the following table to allocate the support cost departments. Round allocated amounts to the nearest whole dollar. If an amount is zero, enter \"0". Support Departments Production Departments Maintenance Administration Log Yard Milling Drying Packaging Hours worked Number of employees Department cost $ $ $ $ $ $ Maintenance Ad ministration Final department costs $ $ $ $ $ $ Using the rounded amounts from the support cost allocation table { previous task), complete the following table to allocate the production department costs to each product line. Round allocated amounts to the nearest whole dollar. Thousand Weight Weighted Weighted \"In of Final Department Cost Allocation Board Feet Factor Thous. Bd. Ft. Board Feet Costs to Product Line Log Yard: Hardwood % x $ $ Softwood >