**Cost Allocation in Service and Production Departments [LO 7-3, 7-5]****Introduction:**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:**Effort Distribution Table:**| From \ To | Premium Rating | Advertising | Sales ||-----------------|----------------|-------------|-------|| Actuarial | 80% | 10% | 10% || Premium Rating | 20% | - | 20% || Advertising | | | || Sales | | | |**Direct Operating Costs:**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**Questions to Solve:**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.**Instructions:**Please complete the above questions by entering your answers in the designated fields. Each method (direct, step, and reciprocal) has different implications for cost distribution and can affect budget planning within HomeLife Life Insurance Company. Understanding and applying these methods are critical for efficient financial management and resource allocation.**Note:**Ensure you thoroughly understand each allocation method's procedure:- **Direct Method:** Allocates service department costs directly to production departments without recognizing any service provided between service departments.- **Step Method:** Allocates service department costs to other service departments as well as production departments, recognizing some of the inter-departmental service provision.- **Reciprocal Method:** Allocates costs recognizing all inter-departmental services. This method is more complex and can provide a more accurate cost distribution.

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 following table: From Actuarial Premium Actuarial Actuarial Premium rating Advertising Sales 20% To Premium Rating 80% Advertising 10% 20 Sales 10% 60 The direct operating costs of the departments (including both variable and fixed costs) are: $ 80,000 15,000 60,000 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 recipro

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 following table: From Actuarial Premium Actuarial Actuarial Premium rating Advertising Sales 20% To Premium Rating 80% Advertising 10% 20 Sales 10% 60 The direct operating costs of the departments (including both variable and fixed costs) are: $ 80,000 15,000 60,000 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 recipro

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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: Actuarial Premium rating Advertising Sales From Actuarial Premium The direct operating costs of the departments (including both variable and fixed costs) are: Actuarial Premium Rating 80% 25% $ 87,000 22,000 67,000 47,000 Advertising department Sales department To Advertising Sales 15% 5% 15 Required 1 Required 2 Required 3 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. Complete this question by entering your…
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