2. HomeLife Life Insurance Company has two service departments (actuarial and pr

Question

2. 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:

From       Actuarial     Rating     Advertising     Sales

Actuarlial     ---                70%          15%           15%

Premium      20%            ---               20              60

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

Actuarial

$

97,000

  Premium rating

32,000

  Advertising

77,000

  Sales

57,000

Required:

1.

Determine the total cost allocated to the advertising and sales departments using the direct method.

      Advertising Dep __________

      Sales Dep _______________

2.

Determine the total cost allocated to advertising and sales using the step method.

      Advertising Dep __________

      Sales Dep _______________

3.

Determine the total cost allocated to advertising and sales using the reciprocal method. (Round your intermediate calculations to the nearest whole dollar and final answers to 2 decimal places.)

      Advertising Dep __________

      Sales Dep _______________

2. 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:

From       Actuarial     Rating     Advertising     Sales

Actuarlial     ---                70%          15%           15%

Premium      20%            ---               20              60

Explanation / Answer

1) Direct method:

2) Step Method

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

second the total of the premium separtment 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 = 32000 + 0.7A

A= 97000+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 = 32000 + 0.7(97000+0.2R)

0.86R = 99900

R = $116163

Therefore,

A = 97000 + 0.2*116163

A = $120233

Department Sum of the percentages Weight Advertising Sales Actuarial 15+15=30 15/30 15/30 Premium 20+60=80 20/80 60/80

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