Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 26, Problem 26.21EX
Activity-based costing for a service company
Safely First Insurance Company tarries three major lines of insurance: auto, workers’ compensation, and homeowners. The company has prepared the following report:
| Safety First Insurance Company Product Profitability Report For the Year Ended December 31 |
|||
| Auto | Workers’ Compensation | Homeowners | |
| Premium revenue | $5,750,000 | $6,240,000 | $8,160,000 |
| Estimated claims | 4,312,500 | 4,680,000 | 6,120,000 |
| Underwriting income | $1,437,500 | $1,560,000 | $2,040,000 |
| Underwriting income as a percent of premium revenue | 25% | 25% | 25% |
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 he 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 | Activity Rates |
| New policy processing | $120 per new policy |
| Cancellation processing | $175 per cancellation |
| Claim audits | $320 per claim audit |
| Claim disbursements processing | $104 per disbursement |
| Premium collection processing | $ 24 per premium collected |
Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:
| Auto | Workers’ Compensation | Homeowners | |
| Number of new policies | 1,320 | 1,500 | 4,080 |
| Number of canceled policies | 480 | 240 | 2,160 |
| Number of audited claims | 385 | 120 | 960 |
| Number of claim disbursements | 480 | 216 | 840 |
| Number of premiums collected | 8,400 | 1,800 | 15,000 |
A. Complete the product profitability report through the administrative activities. Determine the income from operations as a percent of premium revenue, rounded to the nearest whole percent.
B. Interpret the report.
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1
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8
4
220
1,220
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9
3
150
1,210
61,300
10
1
230
1,270
60,100
11
2
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3
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Chapter 26 Solutions
Financial & Managerial Accounting
Ch. 26 - Why would management be concerned about the...Ch. 26 - Why would a manufacturing company with multiple...Ch. 26 - How do the multiple production department and the...Ch. 26 - Under what two conditions would the multiple...Ch. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - Prob. 7DQCh. 26 - Under what circumstances might the activity-based...Ch. 26 - Prob. 9DQCh. 26 - Prob. 10DQ
Ch. 26 - Single plantwide factory overhead rate The total...Ch. 26 - Single plantwide factory overhead rate The total...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity based costing: factory overhead costs The...Ch. 26 - Activity-based costing: factory overhead costs The...Ch. 26 - Activity-based costing: selling and administrative...Ch. 26 - Activity-based costing: selling and administrative...Ch. 26 - Activity-based costing for a service business...Ch. 26 - Activity-based costing for a service business...Ch. 26 - Single plantwide factory overhead rate Nixon...Ch. 26 - Single plantwide factory overhead rate Matts Music...Ch. 26 - Single plantwide factory overhead rate Sally...Ch. 26 - Prob. 26.4EXCh. 26 - Multiple production department factory overhead...Ch. 26 - Single plantwide and multiple production...Ch. 26 - Single plantwide and multiple production...Ch. 26 - Identifying activity bases in an activity-based...Ch. 26 - Product costs using activity rates Nozama.com Inc....Ch. 26 - Prob. 26.10EXCh. 26 - Prob. 26.11EXCh. 26 - Activity cost pools, activity rates, and product...Ch. 26 - Activity-based costing and product cost distortion...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based costing and product cost distortion...Ch. 26 - Single plantwide rate and activity-based costing...Ch. 26 - Evaluating selling and administrative cost...Ch. 26 - Prob. 26.18EXCh. 26 - Prob. 26.19EXCh. 26 - Activity-based costing for a service company...Ch. 26 - Activity-based costing for a service company...Ch. 26 - Single plantwide factory overhead rate Orange...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based and department rate product costing...Ch. 26 - Prob. 26.4APRCh. 26 - Prob. 26.5APRCh. 26 - Product costing and decision analysis for a...Ch. 26 - Single plantwide factory overhead rate Spoiled Cow...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based department rate product costing and...Ch. 26 - Activity-based product costing Sweet Sugar Company...Ch. 26 - Allocating selling and administrative expenses...Ch. 26 - Product costing and decision analysis for a...Ch. 26 - Prob. 26.1CPCh. 26 - Prob. 26.2CPCh. 26 - Activity-based costing for a service company Wells...Ch. 26 - Using a product profitability report to guide...Ch. 26 - Prob. 26.5CPCh. 26 - Prob. 26.6CP
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