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	$ 80,000
Premium rating	15,000
Advertising	60,000
Sales	40,000

 

Required:

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