Financial & Managerial Accounting
14th Edition
ISBN: 9781337119207
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 18, Problem 18.21EX
Activity-based costing for a service company
Safely First Insurance Company tarries three major lines of insurance: auto, workers’ compensation, and homeowners. The company has prepared the following report:
| Safety First Insurance Company Product Profitability Report For the Year Ended December 31 |
|||
| Auto | Workers’ Compensation | Homeowners | |
| Premium revenue | $5,750,000 | $6,240,000 | $8,160,000 |
| Estimated claims | 4,312,500 | 4,680,000 | 6,120,000 |
| Underwriting income | $1,437,500 | $1,560,000 | $2,040,000 |
| Underwriting income as a percent of premium revenue | 25% | 25% | 25% |
Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could he assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:
| Activity | Activity Rates |
| New policy processing | $120 per new policy |
| Cancellation processing | $175 per cancellation |
| Claim audits | $320 per claim audit |
| Claim disbursements processing | $104 per disbursement |
| Premium collection processing | $ 24 per premium collected |
Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:
| Auto | Workers’ Compensation | Homeowners | |
| Number of new policies | 1,320 | 1,500 | 4,080 |
| Number of canceled policies | 480 | 240 | 2,160 |
| Number of audited claims | 385 | 120 | 960 |
| Number of claim disbursements | 480 | 216 | 840 |
| Number of premiums collected | 8,400 | 1,800 | 15,000 |
A. Complete the product profitability report through the administrative activities. Determine the income from operations as a percent of premium revenue, rounded to the nearest whole percent.
B. Interpret the report.
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Activity-Based Costing for a Service Company
Five-Stars Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:
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Underwriting income as a percent of premium revenue
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allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The
administrative expenses are comprised of five activities. The activities and their rates are as follows:
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Product Costing and Decision Analysis for a Service Company
Pleasant Stay Medical Inc. wishes to determine its product costs. Pleasant Stay offers a variety of medical procedures (operations) that are considered its “products.” The overhead has been separated into three major activities. The annual estimated activity costs and activity bases follow:
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Exercise 7-3 (Algo) Compute Activity Rates [LO7-3]
Green Thumb Gardening is a small gardening service using activity-based costing to estimate costs for pricing and other purposes.
The owner of the company believes costs are driven primarily by the size of customer lawns, the size of customer garden beds, the
distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depend on whether
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Accordingly, the company uses the five activity cost pools listed below:
Activity Cost Pool
Caring for lawn
Caring for garden beds-low maintenance
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Activity Cost Pool
Caring for lawn
Caring for garden beds-low maintenance
Caring for garden beds-high maintenance
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Square feet of lawn
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Chapter 18 Solutions
Financial & Managerial Accounting
Ch. 18 - Why would management be concerned about the...Ch. 18 - Why would a manufacturing company with multiple...Ch. 18 - How do the multiple production department and the...Ch. 18 - Under what two conditions would the multiple...Ch. 18 - Prob. 5DQCh. 18 - Prob. 6DQCh. 18 - Prob. 7DQCh. 18 - Under what circumstances might the activity-based...Ch. 18 - Prob. 9DQCh. 18 - Prob. 10DQ
Ch. 18 - Single plantwide factory overhead rate The total...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing: factory overhead costs The...Ch. 18 - Activity-based costing: selling and administrative...Ch. 18 - Activity-based costing for a service business...Ch. 18 - Single plantwide factory overhead rate Nixon...Ch. 18 - Single plantwide factory overhead rate Mozart...Ch. 18 - Single plantwide factory overhead rate Sally...Ch. 18 - Product costs and product profitability reports,...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Identifying activity bases in an activity-based...Ch. 18 - Product costs using activity rates Nozama.com Inc....Ch. 18 - Product costs using activity rates Atlas...Ch. 18 - Activity rates and product costs using...Ch. 18 - Activity cost pools, activity rates, and product...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Single plantwide rate and activity-based costing...Ch. 18 - Evaluating selling and administrative cost...Ch. 18 - Construct and interpret a product profitability...Ch. 18 - Activity-based costing and customer profitability...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Single plantwide factory overhead rate Orange...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based and department rate product costing...Ch. 18 - Activity-based product costing Mello Manufacturing...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Single plantwide factory overhead rate Spoiled Cow...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based department rate product costing and...Ch. 18 - Activity-based product costing Sweet Sugar Company...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Activity-based product cost improvement Gourmet...Ch. 18 - Prob. 2ADMCh. 18 - Production run size and activity improvement...Ch. 18 - Prob. 4ADMCh. 18 - Ethics in Action The controller of Tri Con Global...Ch. 18 - Communication The controller of New Wave Sounds...
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