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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Activity-based costing in an insurance company
Umbrella Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for 20Y2:

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

Activity-base usage data for each line of insurance were retrieved from the corporate records and are shown below.


a.Complete the product profitability report through the administrative activities.
b.Determine the underwriting income as a percent of premium revenue.
C.Determine the Operating income as a percent of premium revenue, rounded to one decimal place.
d.Interpret the report.

To determine

(a)

Concept Introduction:

Activity based costing is one of the costing method that identify the important activities in the organisation and accordingly identify their cost drivers. Then cost is allocated on the basis of activities used by each product.

Through administrative activities complete the product profitability report.

Explanation

The product profitability report through the administrative activities is below:

    ParticularsAuto (in $)Worker compensation (in $)Homeowner (in $)
    New policy processing
      @ $160
    per new policy
      240,000(1,500×160)  232,000(1,450×160)  656,000(4100×160)
    Cancellation processing
      @ $240
    per cancellation
      84,000(350×240)  60,000(250×240)  480,000(2,000×240)
    Claim audit
      @ $500
    per claim audit
    13y13
      160,000(320×500)
    Y13y3
      50,000(100×500)
      350,000(700×500)
    Claim disbursement
      @ $120
    per claim disbursement
      48,000(400×120)  21,600
To determine

(b)

Concept Introduction:

Activity based costing is one of the costing method that identify the important activities in the organisation and accordingly identify their cost drivers. Then cost is allocated on the basis of activities used by each product.

To compute:

The underwriting income as a percent of premium revenue.

To determine

(c)

Concept Introduction:

Activity based costing is one of the costing method that identify the important activities in the organisation and accordingly identify their cost drivers. Then cost is allocated on the basis of activities used by each product.

The operating income as a percent of premium revenue.

To determine

(d)

Concept Introduction:

Activity based costing is one of the costing method that identify the important activities in the organisation and accordingly identify their cost drivers. Then cost is allocated on the basis of activities used by each product.

The interpretation of report.

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