Referring back to her discussion with the chief actuary, Melissa identifies two activities to begin developing activity-based costs: the cost to issue life insurance products and the cost to service them. The project team defines the activities encompassing the cost to issue a policy as the cost to receive and process applications, underwrite policies and print, and collate and mail policies (termed issuance). The cost to maintain policies is defined as the cost of storing policy information, updating policy information as needed, responding to requests for service on insurance policies, the payment of claims and benefits, and the associated computer costs. 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.

5. 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.

6. An activity-based costing system would provide AXE Life with an understanding of the costs to develop, sell, and service their products. How can AXE Life use this information to improve the efficiency and cost effectiveness of their operations?

ACC/ACF2200 Management Accounting S2, 2021 Assignment Table 6: Cost to Receive and Process Life Insurance Application - July 2012 Volumes for Cost Drivers Applications 11,489 New Life Policies 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 - 10,200 10,200 Fixed within range of +/-20% of current levels Furniture 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 Hourly, part time considered variable, others are within a range of +/- 20% of current levels Supplies 62,150 62,150 Vary with applications Depreciation - 32,500 32,500 Fixed within range of +/-20% of current levels Furniture Leased PCs 52,500 52,500 Fixed within range of +/-20% of current levels Allocated Rent 65,250 65,250 Fixed within range of +/-20% of current levels All Other 125,226 125,226 Fixed within range of +/-20% of current levels Total $287,275 $527,976 $815,251 Policy Underwriting: Review and underwrite new life policies Salaries & Benefits 375,125 512,500 887,625 Hourly, part time considered variable; others are within a range of +/-20% of current levels Medical reports 215,047 215,047 Vary with applications Supplies 61,250 61,250 Vary with applications Depreciation - 51,500 51,500 Fixed within range of +/- 20% of current levels Furniture Leased PCs 62,500 62,500 Fixed within range of +/-20% of current levels Allocated Rent 125,250 125,250 Fixed within range of +/-20% of current levels All Other 207,653 207,653 Fixed within range of +/-20% of current levels Total $651,422 $959,403 $1,610,825 Policy Issuance: Process and issue new life policies Postage & Mail 37,540 37,540 Vary with applications Costs Salaries & Benefits 412,525 125,862 538,387 Hourly, part time considered variable, others are within a range of +/- 20% of current levels Supplies 72,175 72,175 Vary with applications Depreciation - 56,750 56,750 Fixed within range of +/- 20% of current levels Furniture Leased PCS 82,500 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 260,362 260,362 Fixed within range of +/-20% of current levels Total $484,700 $670,724 $1,155,424