Question

An activity analysis 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 be 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.

Statewide Insurance Company
Individual activity cost to the total process cost
Activities	Activity Cost	Percent of Total Process Cost
Receiving claim	$	%
Adjusting claim		%
Paying claim		%
Total	$	%

b. Determine the average total process cost per claim payment, assuming 2,000 total claims.
$ per paid claim

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. If an amount box does not require an entry, leave it blank. Use the minus sign to indicate an additional cost in the last column.

Statewide Insurance Company
Changes in the activity costs
Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Saving
Receiving claim	$	$	$
Adjusting claim
Paying claim
Total	$	$	$

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 2,000 total claims.
$ per paid claim

Answer 1

a. Develop a table showing the percent of individual activity cost to the total process cost.

Statewide Insurance Company
Individual activity cost to the total process cost
Activities	Activity Cost	Percent of Total Process Cost
Receiving claim	$120,000	24%
Adjusting claim	$260,000	52%
Paying claim	$120,000	24%
Total	$500,000	100%

b. Determine the average total process cost per claim payment, assuming 2,000 total claims.

Total Process cost = $500,000

Total Claims = 2000

Total process cost per claim = $500,000/2000 = $250

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management.

Statewide Insurance Company
Changes in the activity costs
Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Saving
Receiving claim	$120,000	$132,000	(-)$12,000
Adjusting claim	$260,000	$52,000	$208,000
Paying claim	$120,000	$120,000
Total	$500,000	$304,000	$196,000

Calculations of Activity cost after improvement :-

Receiving Claim = Addition 10% to reciving claims to seggregate the claims

= 1.1 * $120,000

= $132,000

Adjusting Claims = 80% savings on the adjusting claims cost

= 0.2 * $260,000

= $52,000

(d) the average cost per claim payment, assuming that the changes proposed by management are enacted for 2,000 total claims.

Total Process cost = $304,000

Total Claims = 2000

Total process cost per claim = $304,000/2000 = $152