7-41 allocated to the \\.-:l inalá aod Ho\"sin (assuming thet IT soes hust), and
ID: 2399203 • Letter: 7
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7-41
allocated to the .-:l inalá aod Ho"sin (assuming thet IT soes hust), and the reciprocal method. al places (eg" 33.3333%, in your calculations. Determine the costs g programs using the (a) direct method, (b) the step method 3, 7-4,7-5) 7-41 Departuental Cost Allocation: Insurance Company Comprehensive 1n product lines: health insurance and auto insurance. The two product lines are served by three operating ch are necessary for providing the two types of products: claims processing, adminis- tration, and sales. These three operating departments are support technology and operations. The support provided by information other departments is shown below technology and operations to the Operating Departments Support Departments Information Claims Information Technology Operations Technology Operations Processing 20% Administration 40% 50 Sales 20% 30 20% 10% 10Explanation / Answer
Answer a. Direct Method Support Departments Operating Departments Information Technology Operations Claim Processing Administration Sales Total Cost 600,000 1,800,000 450,000 850,000 650,000 Allocation of Cost - Information Tech - (20:40:20) (600,000) - 150,000 300,000 150,000 Allocation of Cost - Operations - (10:50:30) (1,800,000) 200,000 1,000,000 600,000 Total Cost after Allocation - - 800,000 2,150,000 1,400,000 Answer b. Step method - Information Technology First Support Departments Operating Departments Information Technology Operations Claim Processing Administration Sales Total Cost 600,000 1,800,000 450,000 850,000 650,000 Allocation of Cost - Information Tech - (20:20:40:20) (600,000) 120,000 120,000 240,000 120,000 Allocation of Cost - Operations - (10:50:30) - (1,920,000) 213,333 1,066,667 640,000 Total Cost after Allocation - - 783,333 2,156,667 1,410,000 Answer b. Step method - Operations First Support Departments Operating Departments Information Technology Operations Claim Processing Administration Sales Total Cost 600,000 1,800,000 450,000 850,000 650,000 Allocation of Cost - Operations - (10:10:50:30) 180,000 (1,800,000) 180,000 900,000 540,000 Allocation of Cost -Information Tech - (20:40:20) (720,000) 180,000 360,000 180,000 Total Cost after Allocation 60,000 - 810,000 2,110,000 1,370,000 Answer c. Reciprocal method Support Departments Operating Departments Information Technology Operations Claim Processing Administration Sales Total Cost 600,000 1,800,000 450,000 850,000 650,000 Allocation of Cost - Operations (10:10:50:30) 195,918 (1,959,184) 195,918 979,592 587,755 Allocation of Cost -Information Tech (20:20:40:20) (795,918) 159,184 159,184 318,367 159,184 Total Cost after Allocation 0 (0) 805,102 2,147,959 1,396,939 IT = $600,000 + 0.10 Op. Op. = $1,800,000 + 0.20 IT or Say , Op. = $1,800,000 + 0.20 ($600,000 + 0.10 Op.) Op. = $1,959,184 (Approx.) IT = $600,000 + 0.10 X $1,959,184 IT = $795,918 (Approx.)
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