Questions: 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: From / To Actuarial Premium Rating Advertising Sales --------------- Actuarial - 80% 10% 10% Premium 20% - 20 60 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 Determine the total costs of the advertising and sales departments after using the direct method of allocation. Direct Method Total Cost ------ Advertising department Sales department

Solution Steps

To determine the total costs of the advertising and sales departments using the direct method of allocation, we need to allocate the costs of the service departments (actuarial and premium rating) directly to the production departments (advertising and sales) based on the given percentages. The direct method ignores any services provided between the service departments.

1. Calculate the allocation from the actuarial department to the advertising and sales departments.
2. Calculate the allocation from the premium rating department to the advertising and sales departments.
3. Sum the allocated costs with the direct operating costs of the advertising and sales departments to get the total costs.

The allocation from the actuarial department to the advertising and sales departments is calculated as follows:

\[ \text{Allocated to Advertising} = 80000 \times 0.10 = 8000 \] \[ \text{Allocated to Sales} = 80000 \times 0.10 = 8000 \]

The allocation from the premium rating department to the advertising and sales departments is calculated as follows:

\[ \text{Allocated to Advertising} = 15000 \times 0.20 = 3000 \] \[ \text{Allocated to Sales} = 15000 \times 0.60 = 9000 \]

Now, we sum the allocations from both service departments for each production department:

\[ \text{Total Allocated to Advertising} = 8000 + 3000 = 11000 \] \[ \text{Total Allocated to Sales} = 8000 + 9000 = 17000 \]

Finally, we add the direct operating costs to the allocated costs:

\[ \text{Total Cost for Advertising} = 60000 + 11000 = 71000 \] \[ \text{Total Cost for Sales} = 40000 + 17000 = 57000 \]

Final Answer