Question

In: Accounting

Comprehensive Insurance Company has two product lines: health insurance and auto insurance. The two product lines...

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.)

Solutions

Expert Solution

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.

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