Question

Process Activity Analysis for a Service Company

Statewide Insurance Company has a process for making payments on insurance claims as follows:

An activity analysis revealed that the cost of these activities was as follows:

Receiving claim	$45,000
Adjusting claim	195,000
Paying claim	60,000
Total	$300,000

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 5,000 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories. Claims under $1,000 and claims greater than $1,000: claims under $1,000 would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 70% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 15% to the "receiving claim" activity cost.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round the percents to the nearest whole number, if required.

Statewide Insurance Company
Individual activity cost to the total process cost
Activities	Activity Cost	Percent of Total Process
Receiving claim	$	%
Adjusting claim		%
Paying claim		%
Total	$	%

b. Determine the average total process cost per claim payment, assuming 5,000 total claims. Round to the nearest whole dollar.
$ per paid claim

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. If an amount is zero, leave the entry box blank. Use the minus sign to indicate an additional cost in the last column.

Statewide Insurance Company
Changes in the activity costs
Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Saving
Receiving claim	$	$	$
Adjusting claim
Paying claim
Totals	$	$	$

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 5,000 total claims. Round to the nearest cent.
$ per paid claim

Answer 1

a.
Calculate percent of total process
Activities	Activity Cost	Percent of total activity costs
Receiving claim	$45,000	15.00%	45000/300000
Adjusting claim	$195,000	65.00%	195000/300000
Paying claim	$60,000	20.00%	60000/300000
Total	$300,000	100.00%
b.
Total process costs per claim	Total process costs/No of claims processed
Total process costs per claim	300000/5000
Total process costs per claim	$60	per paid claim
c.
Receving claim costs after improvement	45000*1.15
Receving claim costs after improvement	$51,750
Adjusting claim costs per claim	195000/5000
Adjusting claim costs per claim	$39
% of claims for which adjustment is needed	30%	(1-0.70)
Adjusting claim costs after improvement	39*(5000*30%)
Adjusting claim costs after improvement	$58,500
c.
Calculation of changes in activity costs
Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Saving
Receiving claim	$45,000	$51,750	-$6,750
Adjusting claim	$195,000	$58,500	$136,500
Paying claim	$60,000	$60,000	$0
Totals	$300,000	$170,250	$129,750
Thus, total savings would be $129,750
d.
Average costs per claim payment	170250/5000
Average costs per claim payment	$34.05