ACF2200: Management Accounting Product Costs Application in an Insurance Company - Management Assignment Help

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INTRODUCTION

Melissa McAndrews has recently been hired as Vice President for Expense Management at a large insurance company. Her responsibilities include the process for allocating expenses to products. Through discussions with her staff, she has learned that there is a great deal of discontent with the expense allocation process. She decided that one of hertop priorities will be to analyse the product costing process and make necessary corrections. Melissa is a CMA® (Certified Management Accountant) and CPA (Certified Public Accountant) with an undergraduate degree in accounting and a Master of Business Administration (MBA). Although she has worked in various roles with progressing responsibilities throughout her 12-year career, Melissa has never been directly responsible for expense allocations. She has read numerous articles on the current applications of cost accounting techniques in service industries, including activity-based costing (ABC). She believes that she has a good understanding of cost accounting techniques and is eager for her team to improve the expense allocation process. COMPANY OVERVIEW AXE Life Insurance Company is among the leading life insurance companies in the United States. AXE Life employs more than 5,000 people and has assets in excess of $17 billion and annual premiums (“revenue”) in excess of $10 billion. The company is well established with a long successful history. AXE Life sells individual life insurance products, individual annuities, and group annuities. The individual products, both life and annuity, are sold through insurance agents. The group annuity products are sold by banks and brokerage firms. The group business represents approximately 40% of total sales, and the individual business represents the remainder. The company continually develops new products, both life and annuity, typically bringing one or two new products to market each year. The company currently has 17 different life and annuity insurance products. AXE Life has a functional organization structure with Sales, Marketing, Finance, IT, and Service departments representing a functional discipline. The Service department has a joint management team but has separate functions to service annuity products and life insurance products. All other departments provide support to both life and annuity products. Because of the size of the functional departments and their annual expense budgets, there are financial support roles in each department. The financial support staffs provide budgeting and financial analysis support to the departments.

1 Adapted from McGregor (2014): IMA Educational Case Journal 7(3), Art. 1. ACC/ACF2200 Management Accounting S2, 2021 Assignment 4 | P a g e LIFE INSURANCE TERMS, PRODUCTS, AND PROCESSES The two primary types of products sold and serviced by life insurance companies are life insurance and annuities. These two products have different characteristics. In general, life insurance is used for financial protection and annuities for retirement savings.

A life insurance policy provides a payment to the beneficiary upon the death of the insured. An annuity provides a stream of periodic payments to the customer upon attaining a specified age. A life insurance policy is usually sold to customers to provide financial protection for their families in the event of the insured’s death. If the policy provides coverage for the full life of the insured, it is called whole life insurance. If the insurance coverage is only for a specified period, it is called term life insurance. For life insurance, customers most often pay the cost of the policy (“premiums”) over a long period of time. During the period of time that the policy’s coverage is active, the policy is considered to be “inforce.” The process involved with life insurance begins with the sale of the policy, often through a life insurance agent. The life insurance agent meets with the potential customer and gathers personal information, which is collected using an application for insurance. Potential customers also will provide medical information and are often subjected to a medical examination. The application containing personal information and medical information is submitted to the Underwriting department, which is responsible for deciding whether a policy should be issued and the appropriate premium for the policy.

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