The Reliable Insurance Company processes a variety of insurance claims for losses, accidents, thefts and so on.
Question:
The Reliable Insurance Company processes a variety of insurance claims for losses, accidents, thefts and so on. Account analysis using one cost driver has estimated the variable cost of processing the claims for each automobile accident at 0.5 per cent (.005) of the monetary value of all claims related to a particular accident. This estimate seemed reasonable because highcost claims often involve more analysis before settlement. To control processing costs better, however, Reliable conducted an activity analysis of claims processing. The analysis suggested that there are three main cost drivers for the costs of processing claims for car accidents. The drivers and cost behaviour are as follows:
0.2% of Reliable Insurance policyholders property claims.
+ 0.6% of other parties' property claims.
+ 0.8% of total personal injury claims.
1. Estimate the cost of processing each claim using data from
(a). The single-cost-driver analysis and
(b). The three-cost-driver analysis.
2. How would you recommend that Reliable Insurance estimate the cost of processing claims?
Step by Step Answer:
1 Costs are summarized in the table here 2 The threecostdriver analysis estimates of processing costs are considerably different from those using a single cost driver If the activity analyses are reliable then vehicle claims that include personal injury losses are more costly to process than property damage claims If these estimates are relatively inexpensive to keep current and to use then it seems reasonable to adopt the threecostdriver approach Reliable will have more accurate cost estimates and will be better able to plan its claims processing activities Reliable processes many different types of claims however Extending activity analysis to identify multiple cost drivers for all types of claims would result in a complicated system for predicting costs much more complex and costly than simply using the total sterling value of claims Whether to undertake an activity analysis for all types of policies depends on costbenefit considerations Managers can address such considerations by first adopting activity analysis for one type of claim and assessing the usefulness and cost of the more accurate information Using singlecostdriver analysis Total claim amount Estimated processing cost ...View the full answer
Introduction To Management Accounting
ISBN: 9780273737551
1st Edition
Authors: Alnoor Bhimani, Charles T. Horngren, Gary L. Sundem, William O. Stratton, Jeff Schatzberg
