Referring back to her discussion with the chief actuary, Melissa identifies two activities to begin developing activity-based
Question:
Referring back to her discussion with the chief actuary, Melissa identifies two activities to begin developing activity-based costs: the cost to issue life insurance products and the cost to service them. The project team defines the activities encompassing the cost to issue a policy as the cost to receive and process applications, underwrite policies and print, and collate and mail policies (termed “issuance”). The cost to maintain policies is defined as the cost of storing policy information, updating policy information as needed, responding to requests for service on insurance policies, the payment of claims and benefits, and the associated computer costs.
As its first step, the team is going to focus on developing the costs to receive life insurance applications manually and issue a life insurance policy. During July 2012, the company received 11,489 applications and issued 9,385 life insurance policies. Not all applications are issued policies, thus the team must calculate the cost to receive and process the applications and adjust those costs to reflect that approximately one out of five applications does not result in a policy being issued.
5. Use the information provided in Table 6 to calculate the cost to issue a life insurance policy, including receiving and processing applications for each product.
6. An activity-based costing system would provide AXE Life with an understanding of the costs to develop, sell, and service their products. How can AXE Life use this information to improve the efficiency and cost effectiveness of their operations?
