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):

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

The Long Term Care Plus Company

The total cost accumulated in the marketing department using the step method is:

= $104,000

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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