Question

#4, ch7

HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribution of each service department’s efforts (in percentages) to the other departments is shown in the following table: To From Actuarial Premium Rating Advertising Sales Actuarial — 70 % 15 % 15 % Premium 20 % — 20 60 The direct operating costs of the departments (including both variable and fixed costs) are: Actuarial $ 97,000 Premium rating 32,000 Advertising 77,000 Sales 57,000 Required: 1. Determine the total costs of the advertising and sales departments after using the direct method or allocation. 2. Determine the total costs of the advertising and sales departments after using the step method of allocation. 3. Determine the total costs of the advertising and sales departments after using the reciprocal method of allocation. Determine the total costs of the advertising and sales departments after using the direct method or allocation.

Answer 1

From	Acturial	Premium Rating	Advertising	Sales
Actuarial	—	70%	15%	15%
Premium	20%	—	20	60
The direct operating costs of the departments (including both variable and fixed costs) are:
Actuarial	97,000
Premium rating	32,000
Advertising	77,000
Sales	57,000

Proportion at which the cost of services distributed to production departments in direct method:
	Production Departments
	Advertising	Sales	Total
Proportion percentage of Actuarial	15%	15%	30%
Proportion for distribution of cost	15%/30%	15%/30%
Percentage	50%	50%	100%
Proportion percentage of Premium rating	20%	60%	80%
Proportion for distribution of cost	20%/80%	60%/80%
Percentage	25%	75%	100%
Distribution of cost of service departments under Direct method:
Particulars	Service Departments		Production Departments
	Actuarial	Premium Rating	Advertising	Sales
Cost of departments	$                 97,000	$         32,000	$        77,000	$        57,000
Cost of Actuarial distributed to production deptt. at (50%:50%)	$                -97,000		$        48,500	$        48,500
Cost of Premium rating distributed to production deptt. at (25%:75%)		$        -32,000	$          8,000	$        24,000
Total cost of production departments	$ -	$ -	$      133,500	$      129,500

Proportion at which the cost of services distributed to production departments in direct method:
Proportion percentage of Premium rating	20%	60%	80%
Proportion for distribution of cost	20%/80%	60%/80%
Percentage	25%	75%	100%
Distribution of cost of service departments under Step method:
Particulars	Service Departments		Production Departments
	Actuarial	Premium Rating	Advertising	Sales
Cost of departments	$       97,000	$       32,000	$       77,000	$       57,000
Cost of Actuarial distributed to production deptt. at (70%:15%:15%)	$      -97,000	$       67,900	$       14,550	$       14,550
Cost of Premium rating distributed to production deptt. at (25%:75%)		$      -99,900	$       24,975	$       74,925
Total cost of production departments	$ -	$ -	$     116,525	$     146,475

Cost of Departnt A	= 97000+(20%*32000)+(20%*70%A)
	= 1034000 + 0.14 A
A	= 103400/0.86
	$       120,233
Cost of Departnt Pr	=32000+(120233*70%) = 116163

Distribution of cost of service departments under Reciprocal method:
Particulars	Service Departments		Production Departments
	Actuarial	Premium Rating	Advertising	Sales
Cost of departments	$                 97,000	$         32,000	$        77,000	$        57,000
Cost of Actuarial distributed to production deptt. at (70%:15%:15%)	$              -120,233	$         84,163	$        18,035	$        18,035
Cost of Premium rating distributed to production deptt. at (20%;20%:60%)	$                 23,233	$      -116,163	$        23,233	$        69,698
Total cost of production departments	$ -	$ -	$      118,267	$      144,733