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The total cost accumulated in the marketing department using the step method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar; assume the actuarial department goes first):

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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

Step-by-step 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.

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