HomeLife Life Insurance Company has two service departments (actuarial and premi
ID: 2427349 • Letter: H
Question
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
Determine the total cost allocated to the advertising and sales departments using the direct method.
Advertising-
Sales-
Determine the total cost allocated to advertising and sales using the step method.
Advertising-
Sales-
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-
Sales-
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:
Explanation / Answer
1.
The distribution of services departments cost to the production departments under direct method is as under:
Under direct method the cost of service department will not be allocated to other service departments, it ignore the services provided to other service departments.
The proportion at which the cost of service departments allocated to the production departments is calculated as under:
Proportion at which the cost of services distributed to production departments in direct method:
Production Departments
Advertising
Sales
Total
Proportion percentage of Actuarial
10%
10%
20%
Proportion for distribution of cost
10%/20%
10%/20%
Percentage
50%
50%
Proportion percentage of Premium rating
20%
60%
80%
Proportion for distribution of cost
20%/80%
60%/80%
Percentage
25%
75%
100%
The allocation of service cost to the production departments at the above calculated percentages is as under:
$ 18,000
$ 98,000
Total cost of production depratments (Under direct method): Advertising : $109,000 and Sales: 98,000
2.
The allocation of service departments to the production departments under step method is as under:
In this method the cost of one service department is allocated to the other service department also along with the production departments but once the cost of one service department is totally allocated, no cost of other service department will be allocated to the that department. The allocation is made on sequential basis.
Therefore we distribute the cost of actuarial service department to the premium rating service department and both the production departments. But the cost of premium rating service departments will not be redistributed to actuarial service department. The cost premium rating service department will be distributed to production departments only.
The allocation of service departments to production departments under step method:
Total cost of production depratments (Under step method): Advertising : $92,400 and Sales: 114,600
3.
The allocation of cost of service departments to the production departments under reciprocal method is made by considering the proportion of cost to be allocated to service departments too. The equation for allocation of cost of service departments to the production departments is as under:
Cost of A Dept.=$83,000+20%of PR
Cost of PR deptt.=$18,000+80% of A
Cost of A deptt.=$83,000+20%of($18,000+80% 0f A)
=$83,000+$3,600+0.16A
A-0.16A=$86,600
0.84A=$86,600
A=$86,600/0.84
=$103,095.24
Cost of PR deptt.=$18,000+80% of A
=$18,000+($103,095.24*80%)
=$18,000+$82,476.19
=$100,476.19
The distribution of cost of Actuarial service department of $103,095.24 and cost of Premium Rating service department of $100,476.19 in the below proportion is as under:
The allocation of cost of service departments to the production departments is as under:
$ 113,595
Total cost of production depratments (Under reciprocal method): Advertising : $93,405 and Sales: 113,595.
Proportion at which the cost of services distributed to production departments in direct method:
Production Departments
Advertising
Sales
Total
Proportion percentage of Actuarial
10%
10%
20%
Proportion for distribution of cost
10%/20%
10%/20%
Percentage
50%
50%
Proportion percentage of Premium rating
20%
60%
80%
Proportion for distribution of cost
20%/80%
60%/80%
Percentage
25%
75%
100%
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