Question

HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribution of each service department's efforts (in percentages) to the other departments is shown in the following table:

	To
From	Actuarial	Premium Rating	Advertising	Sales
Actuarial	-	80%	10%	10%
Premium	20%	-	20	60

The direct operating costs of the departments (including both variable and fixed costs) are:

Actuarial	$89,000
Premium rating	24,000
Advertising	69,000
Sales	49,000

Required:

1. Determine the total costs of the advertising and sales departments after using the direct method or allocation.

2. Determine the total costs of the advertising and sales departments after using the step method of allocation.

3. Determine the total costs of the advertising and sales departments after using the reciprocal method of allocation.

Answer 1

Answer with working notes is given below

For reciprocal method decimals is not shown since nothing is specified in question

if you need decimals please let me know

Direct method Step method Advertising $119,500 $101,700 Sales $111,500 $129,300 Total $231,000 $231,000 Answer showing to 4 decimal places Reciprocal method Advertising $102,833 Sales $128,167 Total $231,000 Service distribution % Actuarial Advertising Sales Total Premium Rating 80% Actuarial Premium 10% 20% 10% 60% 100% 100% 20% 1 Direct Allocation Production Department Service Department Premium Actuarial Rating $89,000 $24,000 Sales Advertising $69,000 $49,000 -$89,000 $44,500 $44,500 Departmental costs before allocations Allocation Actuarial Department (1:1) Premium rating Department (20:60) -$24,000 $6,000 $18,000 $0 $119,500 $111,500 2 Step Down method Actuarial department cost is allocated first since it renders highest percentage of service Service Department Premium Actuarial Rating $89,000 $24,000 Production Department Advertising Sales $69,000 $49,000 -$89,000 $71,200 $8,900 $8,900 Departmental costs before allocations Allocation Actuarial Department (80:10:10) Premium rating Department (20:60) Total Overheads -$95,200 $23,800 $71,400 $0 $0 $101,700 $129,300 3 Reciprocal method working is given below Production Department Service Department Premium Actuarial Rating $89,000 $24,000 Advertising Sales $69,000 $49,000 Departmental costs before allocations Allocation Actuarial Department Premium rating Department Total Overheads -$111,667 $22,667 $0 $89,334 $113,334 $0 $11,167 $22,667 $102,833 $11,167 $68,000 $128,167 Simultaneous Equation method A=89,000+20%P P= 24,000 + 80%A A= Actuarial P= Premium rating Solving above equation A=89,000 + 20% (24,000+80% A) A= 89,000 +4,800 +0.16 A0.84=$93,800 A=$ 93,800/0.84 Total Cost A= $111,667 P= $113,334