Appendix $2$ Activity$-$Based Costing in an Insurance Company

Quality Insurance Company

Product Profitability Report

For the Year Ended December $31,20Y2$

Workers'

expenses are comprised of five activities. The activities and their rates are as follows:

Activity RatesAppendix $2$ Activity$-$Based Costing in an Insurance Company

Quality Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for $20$Y$2$:

Quality Insurance Company

Product Profitability Report

For the Year Ended December $31,20$Y$2$

Line Item Description

Auto Workers'

Compensation

Homeowners

Premium revenue $$12,240,000$ $$11,050,000$ $$15,640,000$

Less estimated claims $(8,568,000)(7,735,000)(10,948,000)$

Underwriting income $$3,672,000$ $$3,315,000$ $$4,692,000$

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:

Line Item Description Activity Rates

New policy processing $$165$ per new policy

Cancellation processing $$280$ per cancellation

Claim audits $$500$ per claim audit

Claim disbursements processing $$170$ per disbursement

Premium collection processing $$25$ per premium collected

Activity$-$base usage data for each line of insurance were retrieved from the corporate records and are shown below.

Line Item Description Auto Workers' Comp. Homeowners

Number of new policies $1,5001,4504,100$

Number of canceled policies $3502502,000$

Number of audited claims $320100700$

Number of claim disbursements $400180750$

Number of premiums collected $7,5001,50012,000$

Question Content Area

a$.$ Complete the product profitability report including administrative activities.

Quality Insurance Company

Product Profitability Report

For the Year Ended December $31,20$Y$2$

Line Item Description Auto Workers' Comp. Homeowners

Premium revenue $$12,240,000$ $$11,050,000$ $$15,640,000$

Less estimated claims $$(8,568,000)$ $$(7,735,000)$ $$(10,948,000)$

Underwriting income $$3,672,000$ $$3,315,000$ $$4,692,000$

Administrative activities:

New policy processing $New policy processing

$New policy processing

$New policy processing

Cancellation processing Cancellation processing

Cancellation processing

Cancellation processing

Claim audits Claim audits

Claim audits

Claim audits

Claim disbursements processing Claim disbursements processing

Claim disbursements processing

Claim disbursements processing

Premium collection processing Premium collection processing

Premium collection processing

Premium collection processing

Total administrative expenses $Total administrative expenses

$Total administrative expenses

$Total administrative expenses

Operating income $Operating income

$Operating income

$Operating income

Question Content Area

b$.$ Determine the underwriting income as a percent of premium revenue.

Line Item Description Percent

Auto fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_1$

$\%$

Workers' Comp. fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_2$

$\%$

Homeowners fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_3$

$\%$

c$.$ Determine the operating income as a percent of premium revenue, rounded to one decimal place.

Line Item Description Percent

Auto fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_4$

$\%$

Workers' Comp. fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_5$

$\%$

Homeowners fill in the blank $616$ffb$0$a$8$fe$7$ff$6\_6$

$\%$

d$.$ All of the following are true regarding the three insurance lines except: