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: ToFromActuarialPremium RatingAdvertisingSalesActuarial—80%15%5%Premium25%—1560 The direct operating costs of the departments (including both variable and fixed costs) are: Actuarial$ 84,000Premium rating19,000Advertising64,000Sales44,000 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 reciprocal method of allocation.

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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:

	To
From	Actuarial	Premium Rating	Advertising	Sales
Actuarial	—	80%	15%	5%
Premium	25%	—	15	60

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

Actuarial	$ 84,000
Premium rating	19,000
Advertising	64,000
Sales	44,000

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 reciprocal method of allocation.

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