Chapter 26, Problem 26.20EX

Process activity analysis for a service company

Statewide Insurance- Company has a process for making payments on insurance claims as follows:

An activity analysts revealed that the cost of these activities was as follows:

Receiving claim	$120,000
Adjusting claim	260,000
Paying claim	120,000
Total	$ 500,000

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 2,000 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories. Claims under $1,000 and claims greater than $1,000: claims under $1,000 would not be adjusted but would be- accepted upon the insured's evidence of claim. Claims above $1,000 would the adjusted. It is estimated that 80% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 10% to the "receiving claim" activity cost.

• A. Develop a table showing the percent of individual activity cost to the total process cost.
• B. Determine the average total process cost per claim payment, assuming 2,000 total claims.
• C. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. Show columns of activity cost prior to improvement, after improvement, and savings.
• D. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 2,000 total claims.