information technology and operations. The support provided by information technology and opera- administration, and sales. These three operating departments are supported by two departments: tions to the other departments is shown below: Operating Departments Support Departments Claims Information Technology Operations Processing Administration Sales 20% 20% 40% Information 20% technology Operations 10 50 10% 30 The total costs incurred in the five departments are: Information technology Operations Claims processing $ 600,000 1,800,000 450,000 850,000 Administration 650,000 $4,350,000 Sales Total costs

information technology and operations. The support provided by information technology and opera- administration, and sales. These three operating departments are supported by two departments: tions to the other departments is shown below: Operating Departments Support Departments Claims Information Technology Operations Processing Administration Sales 20% 20% 40% Information 20% technology Operations 10 50 10% 30 The total costs incurred in the five departments are: Information technology Operations Claims processing $ 600,000 1,800,000 450,000 850,000 Administration 650,000 $4,350,000 Sales Total costs

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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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

100%

Departmental Cost Allocation; Service Company Comprehensive Insurance Company has two
product lines: health insurance and auto insurance. The two product lines are served by three oper-
ating departments which are necessary for providing the two types of products: claims processing,

information technology and operations. The support provided by information technology and opera-
administration, and sales. These three operating departments are supported by two departments:
tions to the other departments is shown below:
Operating Departments
Support Departments
Claims
Information
Technology
Operations
Processing
Administration
Sales
20%
20%
40%
Information
20%
technology
Operations
10
50
10%
30
The total costs incurred in the five departments are:
$ 600,000
1,800,000
Information technology
Operations
Claims processing
450,000
850,000
Administration
650,000
Sales
$4,350,000
Total costs
Required Use four decimal places (e.g., 33.3333%) in your calculations. Determine the total costs in
each of the three operating departments, after departmental allocations, using (a) the direct method, (b) the
step method (first for information technology going first in the allocation and then for operations going
first), and (c) the reciprocal method.

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