Thus the pricing of the products is also inaccurate which affects the marketability of the product, the management decision on the products sales and the competition in the market.
Like the new policy under annuity scheme requires two major step to issue the policy while the Life insurance policy requires three more steps in additional to the two required by annuity policy.
The new policies for the Midwest business unit under annuities are 10,000 and the policies in force are 45,000.
Thusthge cost allocated to the Annuities of the Midwest can be simple calculated by multiplying the total policies 55,000 with $82.25 being equal to $4,523,750.
Advantage: The single flat rate is easy to implement and use.
The indirect support costs are allocated to the different legal business unit and the product line at the same rate and so it is very easy to implement.
However using the flat rate applies the cost to both the policies at the same rate irrespective of the difference in the level of activities required for the two policies.
1-4 What is the total costs allocated to the three business units (Midwest, Gibson, Compton)?
Helps the management in pricing of the products competitively- With the help of accurate cost allocation to the products and the accurate cost of the products the management is able to price the products more competitively in the market. What would be one disadvantages of this new scheme or something you would change? Answer Though the ABC costing is very helpful in managerial decision making and is an effective tool in costing the products the biggest disadvantage with the technique is the difficulty in identifying the cost pools and the cost drivers. Based on the proposed ABC system, what is the support costs per policy for the four types of products (New and In-Force Annuities, New and In-Force Life Insurance policies).
Hence the organization can gain competitive advantage over others. Helps the management in product planning and cost control – With the help of accurate cost of the products, the management can identify the products which are more profitable to the business and can plan to increase their sales in future. Since it is not possible to have a large number of cost pools and cost drivers as that would result in multiple application rates, the identical cost are to be allocated to specific cost polls and their cost drivers are to be identified. Also any mistake in identifying the cost drivers or the cost polls will result in wrong rates and the objective of the technique would be defied. Show ALL your work and use your overhead rates from Question 2.