Question

Linda Nichol is the department heads for the accounting department at a Montreal insurance firm. Linda discovered that there are a number of costs associated with the claims processing. These costs included the salaries of the two paralegals and an accountant; the cost of claims forms, cheques, envelopes, and postage, and depreciation on the office equipment dedicated to alegals' time is spent in the routine processing of uncontested claims, but much time is spent on the claims that have incomplete documentation or are contested. The accountant's time appears to vary with the number of claims processed. Linda was able to separate the costs of processing claims from the costs of running the departments of accounting and human resources. She gathered the data on claims processing cost and the number of claims processed per month for the past six months. These data are as follows:
I'd be grateful if someone could show how to approach this management accounting problem. Thanks in advance.

Answer 1

1. Calculation of predicted cost of 6,000 claims under High Low Method : Step 1:Calculation of Variable Cost Per Claim: = (Total Cost at High Level - Total Cost at Low Level)/(Claims at High Level - Claims at Low Level) Number of Claims at High Level = 7930 Cost at High Level = $44,895.00 Number of Claims at Low Level = 4900 Variable Cost Per Claim = ($44,895 - $31,260)/(7930-4900) = $4.50 Total Fixed Cost = Total Cost - Total Variable Cost = $44,895 - (7930 x $4.50) = $9,210.00 Cost Equation = $9,210 + ($4.50 x Number of Claims) Calculation of Cost of 6,000 Claims : = $9,210 + ($4.50 x 6000) = $36,210.00

2. Evaluation of 75,600 Claims for Outsourcing or Inhouse Processing: Cost if Inhouse Processing ($9,210 + (75,600 x $4.50) = $349,410.00 Process Cost if Outsourced is higher than that of Inhouse processing. So, it is advisable to Inhouse processing the 75600 claims