Concept explainers
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 |
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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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