Question Completion:
The Long Term Care Plus Company has two service departments — actuarial and premium rating, and two operations departments — marketing and sales. The distribution of each service department's efforts to the other departments is shown below:
FROM TO
Actuarial Rating Marketing Sales
Actuarial 0% 40% 20% 40%
Rating 25% 0% 37.5% 37.5%
The direct operating costs of the departments (including both variable and fixed costs) were as follows:
Actuarial $60,000
Premium Rating $40,000
Marketing $60,000
Sales $70,000
Answer:
The Long Term Care Plus Company
The total cost accumulated in the marketing department using the step method is:
= $104,000
Explanation:
a) Data and Calculations:
Actuarial Rating Marketing Sales
Actuarial 0% 40% 20% 40%
Rating 25% 0% 37.5% 37.5%
Direct costs of each department:
Actuarial Rating Marketing Sales Total
Direct costs $60,000 $40,000 $60,000 $70,000 $230,000
Allocation of
Actuarial (60,000) 24,000 12,000 24,000 0
Allocation of
Rating dept. 0 0 32,000 32,000 0
Total costs $0 $0 $104,000 $126,000 $230,000
Allocation of Actuarial Dept. costs:
Rating dept = 40% of $60,000 = $24,000
Marketing dept = 20% of $60,000 = $12,000
Sales dept = 40% of $60,000 = $24,000
This brings the Rating dept's total cost to $64,000 ($40,000 + $24,000) which is allocated to the Marketing and Sales departments in accordance with their sharing ratios. Since the sharing ratios are 37.5% each, the new ratios become 50:50 or 50% each.
Allocation of Rating Department's cost:
Marketing dept. = 50% of $64,000 = $32,000
Sales dept. = 50% of $64,000 = $32,000
b) The step method of allocating service departments' costs allocates service costs to the operating departments and other service departments in a sequential process, starting with the service department that incurred the greatest costs.
