Question

In: Accounting

Process Activity Analysis for a Service Company Statewide Insurance Company has a process for making payments...

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 $11,400
Adjusting claim 79,800
Paying claim 22,800
Total $114,000

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 3,800 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 5% 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 3,800 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 3,800 total claims. Round to the nearest cent.

$__________ per paid claim

Solutions

Expert Solution


Related Solutions

Process Activity Analysis for a Service Company Statewide Insurance Company has a process for making payments...
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...
Activity-Based Costing for a Service Company Bounce Back Insurance Company carries three major lines of insurance:...
Activity-Based Costing for a Service Company Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report: Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Compensation Homeowners Premium revenue $5,800,000 $6,250,000 $8,200,000 Estimated claims (4,060,000) (4,375,000) (5,740,000) Underwriting income $1,740,000 $1,875,000 $2,460,000 Underwriting income as a percent of premium revenue 30% 30% 30% Management is concerned that the administrative expenses may make...
Process Activity Analysis The Brite Beverage Company bottles soft drinks into aluminum cans. The manufacturing process...
Process Activity Analysis The Brite Beverage Company bottles soft drinks into aluminum cans. The manufacturing process consists of three activities: Mixing: water, sugar, and beverage concentrate are mixed. Filling: mixed beverage is filled into 12-oz. cans. Packaging: properly filled cans are boxed into cardboard "fridge packs". The activity costs associated with these activities for the period are as follows: Mixing $612,000 Filling 543,000 Packaging 165,000 Total $1,320,000 The activity costs do not include materials costs, which are ignored for this...
John has purchased some machinery for his company and has the choice of making payments as...
John has purchased some machinery for his company and has the choice of making payments as follows: Option A: $10,000 now. Option B: $6,000 now and $6,000 at the end of 10 years. Option C: $ 2,500 now and $1000 at the end of each year for 10 years. If the interest rate is 7%, which option would he select?
An insurance company has the following profitability analysis of its services: Life Insurance Auto Insurance Home...
An insurance company has the following profitability analysis of its services: Life Insurance Auto Insurance Home Insurance Revenues $5,000,000 $10,000,000 $3,000,000 Commissions (1,000,000) (2,000,000) (600,000) Payments (3,000,000) (7,300,000) (2,000,000) Fixed Costs (500,000) (500,000) (500,000) Profit $ 500,000 $ 200,000 ($ 100,000) The fixed costs are distributed equally among the services and are not avoidable if one of the services is dropped. What is the profitability of the remaining services if all services with losses are dropped?
An insurance company was conducting performance analysis of their claims handling processes and process cycle time...
An insurance company was conducting performance analysis of their claims handling processes and process cycle time was one of their concerns. They collected a sample data of the process cycle time across a number of different claims handling processes over the past six months. However, the data followed a (non-normal) multimodal distribution instead of a normal distribution. Why? Explain what could be the reason(s) behind this? The company then focused on the CTP insurance claims handling processes and a sample...
An insurance company was conducting performance analysis of their claims handling processes and process cycle time...
An insurance company was conducting performance analysis of their claims handling processes and process cycle time was one of their concerns. They collected a sample data of the process cycle time across a number of different claims handling processes over the past six months. However, the data followed a (non-normal) multimodal distribution instead of a normal distribution. Why? Explain what could be the reason(s) behind this? The company then focused on the CTP insurance claims handling pro- cesses and a...
Consumer Decision-Making: Describe the process of consumer decision making for either hospital services or insurance services....
Consumer Decision-Making: Describe the process of consumer decision making for either hospital services or insurance services. What are the keys elements that influence choice? Consider family, friends, culture and sub-culture, social class, etc. in your answer.
Look for a company that has launched a new, creative product, a new process for making,...
Look for a company that has launched a new, creative product, a new process for making, selling, or distributing products and services, a new way of marketing products or services to customers. Describe the creativity and how management of this company supported or encouraged the change. Include a URL to the company website
Financial analysis of a business is an important part tool in the decision making process by...
Financial analysis of a business is an important part tool in the decision making process by the management of a company. Identify and discuss the types of decisions that management may develop from financial analysis.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT