Question

Activity-Based Costing in an Insurance Company

Umbrella Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for 20Y2:

Umbrella Insurance Company
Product Profitability Report
For the Year Ended December 31, 20Y2
		Auto		Workers' Compensation		Homeowners
Premium revenue		$9,360,000		$8,450,000		$11,960,000
Less estimated claims		(6,552,000)		(5,915,000)		(8,372,000)
Underwriting income		$2,808,000		$2,535,000		$3,588,000

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

	Activity Rates
New policy processing	$180 per new policy
Cancellation processing	$250 per cancellation
Claim audits	$500 per claim audit
Claim disbursements processing	$200 per disbursement
Premium collection processing	$25 per premium collected

Activity-base usage data for each line of insurance were retrieved from the corporate records and are shown below.

	Auto			Workers' Comp.			Homeowners
Number of new policies		1,500			1,450			4,100
Number of canceled policies		350			250			2,000
Number of audited claims		320			100			700
Number of claim disbursements		400			180			750
Number of premiums collected		7,500			1,500			12,000

a. Complete the product profitability report through the administrative activities.

Umbrella Insurance Company
Product Profitability Report
For the Year Ended December 31, 20Y2
	Auto	Workers' Comp.	Homeowners
Premium revenue	$9,360,000	$8,450,000	$11,960,000
Less estimated claims	$(6,552,000)	$(5,915,000)	$(8,372,000)
Underwriting income	$2,808,000	$2,535,000	$3,588,000
Administrative activities:
New policy processing	$	$	$
Cancellation processing
Claim audits
Claim disbursements processing
Premium collection processing
Total administrative expenses	$	$	$
Operating income	$	$	$

b. Determine the underwriting income as a percent of premium revenue.

Auto	%
Workers' Comp.	%
Homeowners	%

c. Determine the operating income as a percent of premium revenue, rounded to one decimal place.

Auto	%
Workers' Comp.	%
Homeowners	%

Answer 1