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 — 75 % 10 % 15 % Premium 20 % — 20 60 The direct operating costs of the departments (including both variable and fixed costs) are: Actuarial $ 88,000 Premium rating 23,000 Advertising 68,000 Sales 48,000 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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       75 %   10 %   15 %
Premium   20 %       20     60  
 

 

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

 

   
Actuarial $ 88,000
Premium rating   23,000
Advertising   68,000
Sales   48,000
 

 

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.

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