In: Accounting
Comprehensive Insurance Company has two product lines: health insurance and auto insurance. The two product lines are served by three operating departments which are necessary for providing the two types of products: claims processing, administration, and sales. These three operating departments are supported by two departments: information technology and operations. The support provided by information technology and operations to the other departments is shown below.
Support Departments | Operating Departments | ||||||||||||||||||
Information Technology | Operations | Claims Processing |
Administration | Sales | |||||||||||||||
Information technology | — | 20 | % | 20 | % | 40 | % | 20 | % | ||||||||||
Operations | 10 | % | — | 10 | 50 | 30 | |||||||||||||
The total costs incurred in the five departments are:
Information technology | $ | 592,000 | |
Operations | 1,680,000 | ||
Claims processing | 310,000 | ||
Administration | 611,000 | ||
Sales | 650,000 | ||
Total costs | $ | 3,843,000 | |
Required:
Determine the total costs in each of the three operating departments, after departmental allocations, using (a) the direct method, (b) the step method (first for information technology going first in the allocation and then for operations going first), and (c) the reciprocal method. (Round percentage calculations to 4 decimal places (e.g., 33.3333%). Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)
Direct method | |||||
Department | Information technology | Operations | Claims processing | Administration | Sales |
Direct overhead | 592,000 | 1,680,000 | 310,000 | 611,000 | 650,000 |
Allocated Information technology In Proportion of 0.2 : 0.4 : 0.2 respectively (0.2+0.4+0.2=0.8) (For Claims processing = 592000*0.2/0.8) | (592,000) | 148,000 | 296,000 | 148,000 | |
Allocated Operations In Proportion of 0.1 : 0.5 : 0.3 respectively (0.1+0.5+0.3=0.9) (For Claims processing = 1680000*0.1/0.9) | (1,680,000) | 186,667 | 933,333 | 560,000 | |
Total cost after departmental allocation using direct method | - | - | $ 644,667 | $ 1,840,333 | $ 1,358,000 |
Step method | |||||
Operations allocated first | |||||
Department | Operations | Information technology | Claims processing | Administration | Sales |
Direct overhead | 1,680,000 | 592,000 | 310,000 | 611,000 | 650,000 |
Allocated Operations In Proportion of 0.1 : 0.1 : 0.5 : 0.3 respectively (0.1+0.1+0.5+0.3=1) (For Claims processing = 1680000*0.1/1) | (1,680,000) | 168,000 | 168,000 | 840,000 | 504,000 |
Total | - | 760,000 | 478,000 | 1,451,000 | 1,154,000 |
Allocated Information technology In Proportion of 0.2 : 0.4 : 0.2 respectively (0.2+0.4+0.2=0.8) (For Claims processing = 760000*0.2/0.8) | (760,000) | 190,000 | 380,000 | 190,000 | |
Total cost after departmental allocation using Step method | - | - | $ 668,000 | $ 1,831,000 | $ 1,344,000 |
Step method | |||||
Information technology allocated first | |||||
Department | Information technology | Operations | Claims processing | Administration | Sales |
Direct overhead | 592,000 | 1,680,000 | 310,000 | 611,000 | 650,000 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively (0.2+0.2+0.4+0.2=1) (For Claims processing = 592000*0.2/1) | (592,000) | 118,400 | 118,400 | 236,800 | 118,400 |
Total | - | 1,798,400 | 428,400 | 847,800 | 768,400 |
Allocated Operations In Proportion of 0.1 : 0.5 : 0.3 respectively (0.1+0.5+0.3=0.9) (For Claims processing = 1798400*0.1/0.9) | (1,798,400) | 199,822 | 999,111 | 599,467 | |
Total cost after departmental allocation using Step method | - | - | $ 628,222 | $ 1,846,911 | $ 1,367,867 |
Reciprocal method | |||||
Department | Information technology | Operations | Claims processing | Administration | Sales |
Direct overhead | 592,000.00 | 1,680,000.00 | 310,000.00 | 611,000.00 | 650,000.00 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively | (592,000.00) | 118,400.00 | 118,400.00 | 236,800.00 | 118,400.00 |
Total | - | 1,798,400.00 | 428,400.00 | 847,800.00 | 768,400.00 |
Allocated Operations In Proportion of 0.1 : 0.1 : 0.5 : 0.3 respectively | 179,840.00 | (1,798,400.00) | 179,840.00 | 899,200.00 | 539,520.00 |
Total | 179,840.00 | - | 608,240.00 | 1,747,000.00 | 1,307,920.00 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively | (179,840.00) | 35,968.00 | 35,968.00 | 71,936.00 | 35,968.00 |
Total | - | 35,968.00 | 644,208.00 | 1,818,936.00 | 1,343,888.00 |
Allocated Operations In Proportion of 0.1 : 0.1 : 0.5 : 0.3 respectively | 3,596.80 | (35,968.00) | 3,596.80 | 17,984.00 | 10,790.40 |
Total | 3,596.80 | - | 647,804.80 | 1,836,920.00 | 1,354,678.40 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively | (3,596.80) | 719.36 | 719.36 | 1,438.72 | 719.36 |
Total | - | 719.36 | 648,524.16 | 1,838,358.72 | 1,355,397.76 |
Allocated Operations In Proportion of 0.1 : 0.1 : 0.5 : 0.3 respectively | 71.94 | (719.36) | 71.94 | 359.68 | 215.81 |
Total | 71.94 | - | 648,596.10 | 1,838,718.40 | 1,355,613.57 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively | (71.94) | 14.39 | 14.39 | 28.77 | 14.39 |
Total | - | 14.39 | 648,610.48 | 1,838,747.17 | 1,355,627.96 |
Allocated Operations In Proportion of 0.1 : 0.1 : 0.5 : 0.3 respectively | 1.44 | (14.39) | 1.44 | 7.19 | 4.32 |
Total | 1.44 | - | 648,611.92 | 1,838,754.37 | 1,355,632.27 |
Allocated Information technology In Proportion of 0.2 : 0.2 : 0.4 : 0.2 respectively | (1.44) | 0.29 | 0.29 | 0.58 | 0.29 |
Total cost after departmental allocation using Reciprocal method | - | - | $ 648,612 | $ 1,838,755 | $ 1,355,633 |
we can stop the same process when the Balance left in service Departments become negligible. |