Riskless Insurance Uses Budgets to Forecast and Monitor Overhead Throughout

question 42

Essay

Riskless Insurance uses budgets to forecast and monitor overhead throughout the organization. The following budget formula relates to the processing of applications for automobile policies in any given month:
Total overhead = $6.80APH + $13,500
where APH = application processing hours
The typical automobile insurance policy has an estimated processing time of 1.5 hours.
During June, management originally anticipated that 320 applications would be processed. Activity was lower than expected, with only 280 applications completed by month-end, and the following costs were incurred: variable overhead, $2,950; fixed overhead, $13,700.
Required:
A. What volume level of applications and processing hours would have been used if Sitka had constructed a static budget?
B. Construct a flexible budget that shows the expected monthly variable and fixed overhead costs of processing 270, 300, and 330 applications.
C. From a cost perspective, did the company perform better or worse than anticipated in June? Show calculations to support your answer.

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Definitions:

Medication

Substances used in treating illness or relieving pain; may refer to over-the-counter or prescription drugs.

Ego State

A concept in psychology that describes different parts of the mind or self that function with some degree of autonomy, such as the parent, child, and adult ego states in transactional analysis.

Decision-Making

The cognitive process of choosing a course of action from among multiple alternatives, often based on reasoning or instinct.

Ambiguous Situations

Circumstances or scenarios that lack clarity or can be interpreted in multiple ways, often leading to confusion or indecision.