The New Manager of the Insurance Division Does Not Understand

question 103

Essay

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters. There is one rate schedule for average assignable costs when agents write standard policies. There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies.
Required:
a. Why might the company have different costing systems with different verhead rates for the standard and specialized policies?
b. Which rate (standard or specialized) would cross- subsidize the other if the company used only one set of overhead rates for costing its policies?

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Definitions:

Conditional Promises

Commitments that are contingent upon the occurrence of a specified event or situation.

Mutual Consideration

The exchange of value or promises that each party agrees to in a contractual agreement.

The Code

A term often used to refer to a specific body of systematic and comprehensive laws or regulations governing a particular area, such as the Uniform Commercial Code.

Illusory

Something that is deceptive or lacks real substance or existence.