PHASE II: ACTIVITY-BASED COSTING

Greg charges the project team to begin work on the second phase of the project, which is to use the expense allocation process to begin to develop activity-based costs.

2. As its next step, the team gathers information in Table 5 and calculates a rate for each of the functions based on the associated volumes. Use the information in Table 5 to calculate cost rates for the functions identified.

Table 5: Cost and Volume Data Department/Function New Business Life New Applications Policy Underwriting Policy Issuance Life ePolicy Issuance Life New Business Annuity New Applications Policy Issued e-Policy Issuance Annuity Customer Service Management Call Center Life Inforce Management Annuity Inforce Management Annuity Surrenders/Payments Claims Management Life Claims Adjusters Life Claims Support Life Claims System Life Insurance System Annuity System Driver New life policies Number of life applications Number of life applications Number of life policies issued Number of electronic life policies New annuity policies Number of annuity applications New annuity policies Number of electronic annuities Number of policies (all) Number of calls Number of life policies Number of annuities Number of annuities Number of life claims Number of life claims Number of life claims Number of life claims Number of life policies Number of annuities Volume 9,345 11,489 11,489 9,385 2,185 9,490 9,925 9,490 1,145 2,275,694 34,884 1,735,251 540,443 101,426 11,327 11,327 11,327 11,327 1,735,251 540,443 Expense $ 191,525 815,251 1,610,825 1,155,424 172,515 397,125 ',215,241 ' ,192,500 173,525 \" ,156,250 910,257 ',115,497 ',485,273 415,125 ' ,101 ,01 0 ',415,000 \Table 6: Cost to Receive and Process Lile Insurance Application - July 2012 Volumes tor Cost Drivers Applications 11,488 New Life Policies 8,385 Function Variable Fixed Total Characteristics of Costs New Business - Life {Management}: Manage new policy underwriting and issuance Salaries 81 Benets 112,522 112,522 Fixed within range of +7- 20% of current levels Supplies 4,252 4,252 Fixed within range of +7- 20% of current levels Depreciation Furniture 10,200 10,200 Fixed within range of +/- 20% of current levels Leased PCs 14,550 14,550 Fixed within range of +/- 20% of current levels Allocated Rent 15,250 15,250 Fixed within range of +/- 20% of current levels All Other 34,551 34,551 Fixed within range of +/- 20% of current levels Total $101,525 $151,525 New Applications: Receive and review new life policy applications Salaries & Benets 225,125 252,500 477,525 Hourly, part time considered variable; others are within a range of +75 20% of current levels Supplies 52,150 52,150 Vary with applications Depreciation Furniture 32,500 32,500 Fixed within range of +7- 20% of current levels Leased PCs 52,500 52,500 Fixed within range of +/- 20% of current levels Allocated Rent 55,250 55,250 Fixed within range of +/- 20% of current levels All Other 125,225 125,225 Fixed within range of +/- 20% of current levels Total $207,275 $527,516 $815,251 Policy Underwriting: Review and undenivrile new life policies Salaries 84 Benets 375,125 512,500 887,525 Hourly, part time considered variable; others are within a range of +/v 20% of current levels Medical reports 215,047 215,047 Vary with applications Supplies 51,250 51,250 Vary with applications Depreciation Furniture 51,580 51,500 Fixed within range of +/- 20% of current levels Leased PCs 52,500 52,500 Fixed within range of +/- 20% of current levels Allocated Rent 125,250 125,250 Fixed within range of +f- 20% of current levels All Other 207,553 207,553 Fixed within range of +f- 20% of current levels Total $551,422 $959,403 $1 .61 0.025 Policy Issuance: Process and issue new life policies Postage & Mail Costs 37,540 37,540 Vary with applications Salaries & Benets 412,525 125,852 538,387 Hourly, part time considered variable; others are within a range of +/- 20% of current levels Supplies 72,175 72,175 Vary with applications Depreciation Furniture 55,750 55,750 Fixed within range of +/- 20% of current levels Leased PCs 82,580 82,500 Fixed within range of +/- 20% of current levels Allocated Rent 145,250 145,250 Fixed within range of +/- 20% of current levels All Other 258,352 250,352 Fixed within range of +/- 20% of current levels Total $610,124 $1,155,424