The Greater Insurance Company has two service departments -- actuarial (S1) and premium rating (S2), and two production departments -- marketing and sales. The distribution of each service department's efforts to the other departments is shown below:
Actuarial Premium Marketing Sales
S1 0% 40% 25% 35%
S2 50% 0% 10% 40%
The direct operating costs of the departments (including both variable and fixed costs) were as follows:
Premium Rating $30,000
Question 1a- Allocate the service department costs to the production departments using the direct method.
Question 1b- Allocate the service department costs to the production departments using the step method.
Question 2- Why do organizations use budgeted rates instead of actual rates to allocate the costs
of support departments to each other and to user departments and divisions? Explain.
The solution explains how to allocate costs using direct method and step method