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:
| 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 |
a. 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 | % | % | % |
Feedback
a. Calculate Activity Cost for each product:
Activity-Base Usage x Activity Rate = Activity Costs
Subtract each activity cost from underwriting income for each product to obtain income from operations.
Divide income from operations by premium revenue to obtain a percentage.
b. Interpret the report.
All three insurance lines have the same percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume administrative activities. The Homeowners insurance line has the least profitability because it has smaller and more frequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the other two lines (over 50% of new policies). Lastly, the Homeowners line has more premium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the Workers' Compensation line consumes the fewest administrative activities, causing it to be very profitable. The Auto line is in between these two.
Activity-Based Costing for a Service Company Bounce Back Tnsurance Company carrles 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 Workers Auto Homeowners Compensation Premium revenue $5,900,000 $6,250,000 $8,200,000 (4,060,000) (4,375,000) (5,740,000) Estimated claims $1,740,000 $1,075,000 $2460.000 Underwriting income Underwriting income as a percent of 30% 30% 30% premium revenue Management is concemed that the administrative expanses may make soma of the insurance lines unprofitable. Howaver, the administrative axpenses 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 actlvities and their rates are as tollows Activity Activity Rates New policy procanting $110 per new palicy Cancellation processing $180 per cancellation Claim audits $330 per daim audit $100 per disbursement claim disbursements processing $25 per premium collected Premium collection processing Activity-base usage data for each line of insurance were retrieved frum the corporate records as follows: Workers Auto- Homeowners Compensation Number of new policies 1,330 1,400 4,100 Number of canceled pollcies 490 300 2.200 Number of audited claims 390 110 950 Number of claim disbursements 470 220 850 Numbar of premiums collected 8,500 1,900 15,200 a. Complete the product profitability report through the administrative activities. Determine the aperating income as a percent of premium revenue. Rounded to the nearest whole percent Bounce Back Insurance Company Product Profitahility Report For the Year Ended December 31 Workers Conmp. Auto Homeowners Premlum revenu Estmated claims Underwntng income Administrative activities New polcy processing Cancellation prOcessing Claim audts Claim dsbursements processing Premium collection procang Total adminbtrative expenses Operating incoma Operating Income as a percent of premium revenue Feadhack Check My Work a. Calculate Activiy Cost for each product: Activity-Base Usage x Activity Rate Activity Costs Subtract each activity cost from underwriting income for each product to obtain income from operations. Divide income from aperations hy pramium ravenue to obtain a percentage b. Interpret the report All three insurance lines have the same percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume administrative activitles. The Homeowners insurance line has the least profitability because it has smaller and more freguent claims that require more auditing and disbursement processing than do the ather two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the ather two lines (over 503 of new polides). Lastly, the Homeowners line has more premium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the than do the other two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the other twolines (over 505 of new policies). Lastly, the Homeowners line has more promium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the Workers' Compensation line consumes the fewest administrative activities, causing it to he very profitable. The Auto line is in hetwean these twn. l Activity-Based Costing for a Service Company Bounce Back Tnsurance Company carrles 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 Workers Auto Homeowners Compensation Premium revenue $5,900,000 $6,250,000 $8,200,000 (4,060,000) (4,375,000) (5,740,000) Estimated claims $1,740,000 $1,075,000 $2460.000 Underwriting income Underwriting income as a percent of 30% 30% 30% premium revenue Management is concemed that the administrative expanses may make soma of the insurance lines unprofitable. Howaver, the administrative axpenses 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 actlvities and their rates are as tollows Activity Activity Rates New policy procanting $110 per new palicy Cancellation processing $180 per cancellation Claim audits $330 per daim audit $100 per disbursement claim disbursements processing $25 per premium collected Premium collection processing Activity-base usage data for each line of insurance were retrieved frum the corporate records as follows: Workers Auto- Homeowners Compensation Number of new policies 1,330 1,400 4,100 Number of canceled pollcies 490 300 2.200 Number of audited claims 390 110 950 Number of claim disbursements 470 220 850 Numbar of premiums collected 8,500 1,900 15,200 a. Complete the product profitability report through the administrative activities. Determine the aperating income as a percent of premium revenue. Rounded to the nearest whole percent Bounce Back Insurance Company Product Profitahility Report For the Year Ended December 31 Workers Conmp. Auto Homeowners Premlum revenu Estmated claims Underwntng income Administrative activities New polcy processing Cancellation prOcessing Claim audts Claim dsbursements processing Premium collection procang Total adminbtrative expenses Operating incoma Operating Income as a percent of premium revenue Feadhack Check My Work a. Calculate Activiy Cost for each product: Activity-Base Usage x Activity Rate Activity Costs Subtract each activity cost from underwriting income for each product to obtain income from operations. Divide income from aperations hy pramium ravenue to obtain a percentage b. Interpret the report All three insurance lines have the same percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume administrative activitles. The Homeowners insurance line has the least profitability because it has smaller and more freguent claims that require more auditing and disbursement processing than do the ather two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the ather two lines (over 503 of new polides). Lastly, the Homeowners line has more premium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the than do the other two lines. In addition, the Homeowners line has a much higher rate of cancellation relative to the other twolines (over 505 of new policies). Lastly, the Homeowners line has more promium collections compared to the other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the Workers' Compensation line consumes the fewest administrative activities, causing it to he very profitable. The Auto line is in hetwean these twn. l
