Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 50

Departmental Cost Allocation; Insurance Company CareMark Insurance Company has two service lines, health insurance and auto insurance. The two product lines are served by three operating departments which are necessary for providing the two types of services: claims processing, administration, and sales. These three operating departments are supported by two departments: information technology and facilities. The support provided by information technology and facilities to the other departments is shown below.

	Support Departments		Operating Departments
	Information Technology	Facilities	Claims Processing	Administration	Sales
Information technology	—	30%	30%	20%	20%
Facilities	10%	—	20	40	30

The total costs incurred in the five departments are:

Information technology	$600,000
Facilities	1,800,000
Claims processing	345,000
Administration	875,000
Sales	555,000
Total costs	$4,175,000

Required Allocate the $4,175,000 total departmental costs to the three operating departments using (a) the direct method, (b) the step method (for both information technology and facilities going first in the allocation), and (c) the reciprocal method.