HomeLife Life Insurance Company has two service departments (actuarial and premi

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 0 Premium From Actuarial Rating Advertising Sales Actuarial Premium 20% 10% 20 10% 60 The direct operating costs of the departments (including both variable and fixed costs) are Actuarial Premium ratino Advertising Sales $89,000 24,000 69,000 49,000 Required 1. Determine the total cost allocated to the advertising and sales departments using the direct method Total Cost Allocated Advertising department Sales department 2. Determine the total cost allocated to advertising and sales using the step method Total Cost Allocated Advertising department Sales department 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.) Total Cost Allocated Advertising department Sales department

Explanation / Answer

Answer

1. Direct Method   

Advertising Department : $119,500

   Sales Department : $111,500

2. Step Method

Advertising Department : $101,700

   Sales Department : $129,300

3. Reciprocal Method

Advertising Department : $102,834

   Sales Department : $128,167

Explanation :

Direct Method :

Net service to both Production Departments (Advertising and Sales) for the Actuarial Service Department =

100% - 80% = 20%

Advertising Department share: 10% / 20% = 0.5

Sales Department share: 10% / 20% = 0.5

Net Service to both Production Departments for Premium Department = 100% 20% = 80%

Advertising Department share: 20% / 80% = 0.25

Sales Department share: 60% / 80% = 0.75

2. Step Method

3. Reciprocal Method

Solve the Simultaneous Equations:(S1=Actuarial; S2=Premium)

S1= $89,000 + .2 x S2

S2= $24,000 + .8 x S1

S1= $89,000 + .2 x ($24,000 + .8 x S1)

S1=$111,667

S2= $24,000 + .8 x $111,667

S2=$113,333

Total cost for each production Department

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Advertising Department Sales Department Actuarial Dept Cost allocation $44,500 $44,500 Premium Dept. Cost allocation $6,000 $18,000 Add : Initial Production Dept Cost $69,000 $49,000 Total Cost for each production Dept. $119,500 $111,500

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