Question

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 $ 562,000 Operations 1,680,000 Claims processing 310,000 Administration 611,000 Sales 650,000 Total costs $ 3,813,000 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.)

Answer 1

Direct method
Department	Information technology	Operations	Claims processing	Administration	Sales
Budgeted annual cost	562,000	1,680,000	310,000	611,000	650,000
Information technology allocated cost 20:40:20 respectively (20+40+20 = 80) (for claim processing = 562000*40/80)	(562,000)		140,500	281,000	140,500
Operations allocated cost 10:50:30 respectively		(1,680,000)	186,667	933,333	560,000
Total cost after departmental allocation	-	-	637,167	1,825,333	1,350,500
Step method
Department	Information technology	Operations	Claims processing	Administration	Sales
Budgeted annual cost	562,000	1,680,000	310,000	611,000	650,000
Information technology allocated cost 20:20:40:20 respectively (20+20+40+20 = 100) (for claim processing = 562000*40/100)	(562,000)	112,400	112,400	224,800	112,400
Total	-	1,792,400	422,400	835,800	762,400
Operations allocated cost 10:50:30 respectively		(1,792,400)	199,156	995,778	597,467
Total cost after departmental allocation	-	-	621,556	1,831,578	1,359,867
Reciprocal method
Department	Information technology	Operations	Claims processing	Administration	Sales
Budgeted annual cost	562,000.00	1,680,000.00	310,000.00	611,000.00	650,000.00
Information technology allocated cost 20:20:40:20 respectively	(562,000.00)	112,400.00	112,400.00	224,800.00	112,400.00
Total	-	1,792,400.00	422,400.00	835,800.00	762,400.00
Operations allocated cost 10:10:50:30 respectively	179,240.00	(1,792,400.00)	179,240.00	896,200.00	537,720.00
Total	179,240.00	-	601,640.00	1,732,000.00	1,300,120.00
Information technology allocated cost 20:20:40:20 respectively	(179,240.00)	35,848.00	35,848.00	71,696.00	35,848.00
Total	-	35,848.00	637,488.00	1,803,696.00	1,335,968.00
Operations allocated cost 10:10:50:30 respectively	3,584.80	(35,848.00)	3,584.80	17,924.00	10,754.40
Total	3,584.80	-	641,072.80	1,821,620.00	1,346,722.40
Information technology allocated cost 20:20:40:20 respectively	(3,584.80)	716.96	716.96	1,433.92	716.96
Total	-	716.96	641,789.76	1,823,053.92	1,347,439.36
Operations allocated cost 10:10:50:30 respectively	71.70	(716.96)	71.70	358.48	215.09
Total	71.70	-	641,861.46	1,823,412.40	1,347,654.45
Information technology allocated cost 20:20:40:20 respectively	(71.70)	14.34	14.34	28.68	14.34
Total	-	14.34	641,875.80	1,823,441.08	1,347,668.79
Operations allocated cost 10:10:50:30 respectively	1.43	(14.34)	1.43	7.17	4.30
Total	1.43	-	641,877.23	1,823,448.25	1,347,673.09
Information technology allocated cost 20:20:40:20 respectively	(1.43)	0.29	0.29	0.57	0.29
Total	-	0.29	641,877.52	1,823,448.82	1,347,673.38
Operations allocated cost 10:10:50:30 respectively		(0.29)	0.03	0.15	0.09
Total cost after departmental allocation	-	-	641,878	1,823,449	1,347,673