Home Life Insurance Company Has Two Service Departments (Actuarial and Premium

Essay

Home Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribution of each service department's efforts (in percentages) to the other departments is as follows:
$\begin{array}{lllll} & \underline{\text { Actuarial }} & \text { Premium } & \text { Advertising } &\underline{ \text { Sales }} \\&&\text { Rating } \\\text { Actuarial } & - & 80\%& 10 \% & 10 \% \\\text { Premium } & 20 \% & - & 20 \% & 60 \%\end{array}$ The direct operating costs of the departments are: $\begin{array} { l l } \text { Actuarial } & \$ 80,000 \\\text { Premium Rating } & 15,000 \\\text { Advertising } & 60,000 \\\text { Sales } & 40,000\end{array}$ Required:
A. Use the reciprocal services method to formulate the equations to be used for allocating the total cost to advertising and sales and calculate the reciprocated cost of each service department.
B. Use the reciprocal cost method and calculate the total cost allocated to each operating department.