Departmental Cost Allocation; Insurance Company CareMark Insurance Company has two service lines, health insurance and auto insurance. The two product lines are served by three operating departments which are necessary for providing the two types of services: claims processing, administration, and sales. These three operating departments are supported by two departments: information technology and facilities. The support provided by information technology and facilities to the other departments is shown below.
| Support Departments | Operating Departments | |||
| Information Technology | Facilities | Claims Processing | Administration | Sales |
Information technology | — | 30% | 30% | 20% | 20% |
Facilities | 10% | — | 20 | 40 | 30 |
The total costs incurred in the five departments are:
Information technology | $600,000 |
Facilities | 1,800,000 |
Claims processing | 345,000 |
Administration | 875,000 |
Sales | 555,000 |
Total costs | $4,175,000 |
Required Allocate the $4,175,000 total departmental costs to the three operating departments using (a) the direct method, (b) the step method (for both information technology and facilities going first in the allocation), and (c) the reciprocal method.
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