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HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments...

HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribution of each service department’s efforts (in percentages) to the other departments is shown in the following table:

To
From Actuarial Premium Rating Advertising Sales
Actuarial — 80 % 10 % 10 %
Premium 20 % — 20 60

The direct operating costs of the departments (including both variable and fixed costs) are:

Actuarial $ 89,000
Premium rating 24,000
Advertising 69,000
Sales 49,000

Required:

1. Determine the total costs of the advertising and sales departments after using the direct method or allocation.

2. Determine the total costs of the advertising and sales departments after using the step method of allocation.

3. Determine the total costs of the advertising and sales departments after using the reciprocal method of allocation.

Solutions

Expert Solution

1) Direct method:

Department Sum of the percentages Weight Weight
Advertising Sales
Actuarial 10+10=20 10/20 10/20
Premium 20+60=80 20/80 60/80
Department Advertising sales Actuarial Premium
Allocated Overheads 69000 49000 89000 24000
Dept. Actuarial reallocation 44500 44500 -89000
Dept. Premium reallocation 6000 18000 -24000
Total 119500 111500

2) Step Method

Department Advertising sales Actuarial Premium
Allocated Overheads 69000 49000 89000 24000
Dept. Actuarial reallocation 8900 8900 -89000 71200
Dept. Premium reallocation 23800 71400 -95200
Total 101700 129300

Note: First the cost of the Actuarial department has been apportioned in the given percentage in question.

second, the total of the premium department has been apportioned in the ratio of 20: 60 to the production departments.

3) Reciprocal Method:

Equations for the allocation of service department costs

R = 24000 + 0.8A

A = 89000 + 0.2R

Where the variables A and R represent the total costs to allocate from each of these service departments

Solving the two equations we get

R = 24000 + 0.8(89000 + 0.2R)

0.84R = 95200

R = $113333

Therefore,

A = 89000 + 0.2*113333

A = $111667

Department Advertising sales Actuarial Premium
Allocated Overheads 69000 49000 89000 24000
Dept. Actuarial reallocation 11167 11167 -111667 89333
Dept. Premium reallocation 22667 68000 22667 -113333
Total 102834 128167

ekkarill92 answered 1 year ago
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