Departmental Cost Allocation: Service CompanyComprehensive Insurance Company has two products lines: health insurance and auto...
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Departmental Cost Allocation: Service CompanyComprehensive Insurance Company has two products lines: health insurance and auto insurance. The two products lines are served by three operating departments which are necessary for providing the two types of products: claims processing, administration, and sales. These three operating departments are supported by two departments: information technology and operations. The support provided by information technology and operations to the other department is shown below:
Support DepartmentsOperating Departments
Information TechnologyOperationsClaims ProcessingAdministrativeSales
Information
Technology---------20%20%40%20%
Operations10%----------105030
The total cost incurred in the five departments are:
Information technology$600,000
Operations1,800,000
Claims Processing450,000
Administration850,000
Sales650,000
Total costs$4,350,000
Required:Use 4 or more decimals 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 the information technology going first in the allocation and then for operating going first), and (c) the reciprocal method.
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