Gibson Insurance Company (GIC) deals with a difficulty throughout the current year. GIC’s present expense allowance system need to be modified to accommodate the implementation of a new management preparation and efficiency management system. The objective is to better assign GIC’s corporate support-service costs to business lines and business systems in an outcome of more accurate pricing methods, sales payment and enhanced expense control. We have actually examined GIC’s circumstance based on the provided info, and concluded with an option to improve the old expense allotment system.
The brand-new expense allocation utilizes adjusted cost bases which much better reflects to the actual usage for new and current policies. More support-service expenses are designated to new policies than existing ones as it needs more resources for execution. We have likewise provided recommendations to improve the new allowance approach. We suggested that GIC use action method and modified allocation bases to efficiently manage costs, procedure performance and show real costs
In this method, it has actually classified fifty cost accounts into 4 classifications and designated a distinct allotment base for each, and used direct method to designate the support-service costs to each service unit.
Table 1. Unit Assistance Expense Per Policy Based on the new allotment bases, we calculate the system support expense per policy (Table 1). Initially, GIC used the variety of policies as the only allocation base. The cost per policy was $82. 25, no matter which product line it was. However, from the Table 1, we have found out that total cost per policy has different unit cost under the new allocation bases.
For example, the unit cost per new life insurance is $438. 22, which is $355. 97 more when it was under the old cost allocation base. While the new cost per in-force life insurance is $45. 26 less when it was under the old base. This demonstrates the fact that different policy actually requires different level of services from each support service department. In general, all new policies will be assigned more cost than the in-force ones. It matches the reality that actually more support services are consumed by the new policies. Table 2.
Total Support Costs by Product for Each Legal Business Unit & Comparison with the Old Allocated Costs In Table 2, we have used the total unit support cost per policy in Table 1 to calculate the new support service costs allocated by the revised allocation bases and compared the results with the old allocated costs for each business unit
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