Gibson Insurance Company
Gibson Company is an insurance company that mainly sells annuities and life insurance. Gibson possesses two subsidiary companies, Midwest and Compton, which also sell the same products but with different prices and features. Both subsidiaries rely on Gibson provides administrative supports for maintaining. Gibson used to use an objective measure to calculate each policy as the support costs allocation basis. The original method did not reflect the real cost by support activities. Moreover, when the sales volume had increased, the profitability declined. The managers are considered the prices are set improper or costs are out of control. Management is looking for a better solution for solving pricing and support costs allocation. Therefore, the controller of Gibson, Rebecca Hampton, is asked to investigate these issues and has to figure out a better strategy for improving cost allocations. However, Hampton is an experienced controller and contributes her professional to set a new costs allocation method more precisely. She classifies numerous cost accounts as 4 categories and listed costs details for new allocation bases.
1. Calculate the unit support cost per policy for new and in-force annuity and life insurance policies using the new allocation bases. In addition, calculate the total support costs to be reported by product for each legal business unit entity.
Step 1. Calculate Total Activities and Cost by Activity.
A. From Exhibit 3 Data Summary for New Allocation Bases, Hampton provides each support activity details. As referring to the provided policy units for the company from Exhibit 1 Number of Policies by Type and Business Unit for this Year, we can get the total activities by support activities time policy units. B. Based on above results, we divide total activities by support costs to get the cost by per support activity. (Support costs from the table on page-3) Step 2. Calculate Cost Amount.
As the new allocation bases, we use total activities time cost by activity and times each new basis, thus we get the total cost for each policy. Step 3. Calculate Support Cost by Policy
Using the above result of cost by activity time each support activity steps or contacts, then get the total support cost by policy.
|Table 1. Support Costs by Policy | | |Annuities |Life Insurance | |Support Costs |New Basis |New |In-force |New |In-force | |Policy acquisition |Steps |$84 |$0 |$211 |$0 | |Customer service |Calls |$22 |$9 |$26 |$18 | |Sales and marketing |Contacts |$100 |$0 |$200 |$0 | |Corporate overhead |AUM |$15 |$15 |$0 |$19 | |Total Cost | |$221.52 |$23.73 |$438.22 |$37.02 |
Step 4. Calculate Total Support Costs by Product for each Legal Business Unit Entity. Since the support activities are from three companies, we have to weight the proportion of each company engaged. Using number of policies by a company divides by the total number of policies and then time the total cost for each policy. Therefore, we get the total costs by company and also by products. |Table 2. Total Support Costs by Product for each Legal Business Unit Entity | | |Midwest |Gibson |Compton |Total...
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