4.6Activity-Based Costing for a Service Company

Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:

Bounce Back Insurance Company

Product Profitability Report

For the Year Ended December 31

Auto Workers' Compensation Homeowners

Premium revenue $5,800,000 $6,250,000 $8,200,000

Estimated claims (4,060,000) (4,375,000) (5,740,000)

Underwriting income $1,740,000 $1,875,000 $2,460,000

Underwriting income as a percent of premium revenue 30% 30% 30%

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

Activity Activity Rates

New policy processing $110 per new policy

Cancellation processing $180 per cancellation

Claim audits $330 per claim audit

Claim disbursements processing $100 per disbursement

Premium collection processing $25 per premium collected

Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:

Auto Workers' Compensation Homeowners

Number of new policies 1,330 1,400 4,100

Number of canceled policies 490 300 2,200

Number of audited claims 390 110 950

Number of claim disbursements 470 220 850

Number of premiums collected 8,500 1,900 15,200

Activity Based Costing for a Service Company Bounce Back Insurance Company carries three major lines of insurance auto, workers' compensation, and homeowners. The company has prepared the following report: Homeowners Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Workers Auto Compensation Premium revenue $5,800,000 $6,250,000 Estimated claims (4,060,000) (4,375,000) Underwriting income $1,740,000 $1,875,000 Underwriting income as a percent of 30% 30% premium revenue $8,200,000 (5,740,000) $2,460,000 30% Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows: Activity New policy processing Cancellation processing Claim audits Claim disbursements processing Activity Rates $110 per new policy $180 per cancellation $330 per claim audit $100 per disbursement $25 per premium collected Premium collection processing Activity base usage data for each line of insurance were retrieved from the corporate records as follows: Auto Homeowners Workers' Compensation 1,400 300 1,330 490 390 4,100 2,200 950 110 Number of new policies Number of canceled policies Number of audited claims Number of claim disbursements Number of premiums collected 470 220 850 8,500 1,900 15,200 bold Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent. Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Comp. Homeowners Premium revenue Estimated claims Underwriting income Administrative activities New policy processing Cancellation processing Claim audits Claim disbursements processing Premium collection processing Total administrative expenses Operating income Operating income as a percent of premium revenue