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.

As its first step, the team is going to focus on developing the costs to receive life insurance applications manually and issue a life insurance policy. During July 2012, the company received 11,489 applications and issued 9,385 life insurance policies. Not all applications are issued policies, thus the team must calculate the cost to receive and process the applications and adjust those costs to reflect that approximately one out of five applications does not result in a policy being issued.

3. Use the information provided in Table 6 to calculate the cost to issue a life insurance policy, including receiving and processing applications for each product.

Table 5: Cost and Volume Data Driver Volume 9,345 11,489 11,489 9,385 Department/Function New Business Life New Applications Policy Underwriting Policy Issuance - Life e-Policy 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 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 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 Expense $ 191,525 815,251 1,610,825 1,155,424 172,515 397,125 1,215,241 1,192,500 173,525 1,156,250 910,257 1,115,497 1,485,273 415,125 1,101,010 1,415,000 1,227,904 1,215,250 1,229,850 $1,201,525 11,327 1,735,251 540,443 Table 6: Cost to Receive and Process Life Insurance Application - July 2012 Volumes for Cost Drivers Applications New Life Policies 11,489 9,385 Function Variable Fixed Total Characteristics of Costs New Business - Life (Management): Manage new policy underwriting and issuance Salaries & Benefits 112,522 112,522 Fixed within range of +/-20% of current levels Supplies 4.252 4,252 Fixed within range of +/- 20% of current levels Depreciation - Furniture 10,200 10,200 Fixed within range of +/- 20% of current levels Leased PCs 14,650 14,650 Fixed within range of +/- 20% of current levels Allocated Rent 15,250 15,250 Fixed within range of +/- 20% of current levels All Other 34,651 34,651 Fixed within range of +/- 20% of current levels Total $191,525 $191,525 New Applications: Receive and review new life policy applications Salaries & Benefits 225,125 252,500 477,625 62,150 62,150 32.500 32,500 Supplies Depreciation - Furniture Leased PCs Allocated Rent All Other Total Hourly, part time considered variable; others are within a range of +/-20% of current levels Vary with applications Fixed within range of +/- 20% of current levels Fixed within range of +/- 20% of current levels Fixed within range of +/- 20% of current levels Fixed within range of +/- 20% of current levels 52,500 65.250 52,500 65,250 125,226 125,226 $287,275 $527,976 $815,251 Policy Underwriting: Review and underwrite new life policies Salaries & Benefits 375,125 512,500 887,625 215,047 215,047 61,250 Medical reports Supplies Depreciation - Furniture Leased PCs Allocated Rent All Other Total Hourly, part time considered variable: others are within a range of +/- 20% of current levels Vary with applications Vary with applications Fixed within range of +/-20% of current levels Fixed within range of +/- 20% of current levels Fixed within range of +/- 20% of current levels Fixed within range of +/-20% of current levels 61,250 51,500 62,500 125,250 207.653 51,500 62,500 125,250 207,653 $959,403 $651,422 $1,610,825 Policy Issuance: Process and issue new life policies Postage & Mail Costs 37.540 Salaries & Benefits 412.525 125,862 37,540 538,387 72,175 Supplies Depreciation - Furniture Leased PCs Allocated Rent All Other Total 56,750 82,500 145,250 260,362 $670,724 72,175 56,750 82,500 145,250 260,362 $1,155,424 Vary with applications Hourly, part time considered variable; others are within a range of +/-20% of current levels Vary with applications Fixed within range of +/-20% of current levels Fixed within range of +/-20% of current levels Fixed within range of +/- 20% of current levels Fixed within range of +/-20% of current levels $484,700