annuity life insurance company alic markets several types of life insurance policies 544802

Standard Costing in a Service Company

C 5. Annuity Life Insurance Company (ALIC) markets several types of life insurance policies, but P20A—a permanent, 20-year life annuity policy—is its most popular. This policy sells in $10,000 increments and features variable percentages of whole life insurance and single-payment annuities, depending on the policyholder’s needs and age. ALIC devotes an entire department to supporting and marketing the P20A policy. Because both the support staff and the sales persons contribute to each P20A policy, ALIC categorizes them as direct labor for purposes of variance analysis, cost control, and performance evaluation. For unit costing, each $10,000 increment is considered one unit; thus, a $90,000 policy is counted as nine units. Standard unit cost information for January is as follows:

Actual costs incurred for the 265 units sold during January were as follows:

Normal monthly capacity is 260 units, and the budgeted fixed operating overhead for January was $53,820.

1. Compute the standard hours allowed in January for policy support staff and policy sales persons.

2. What should the total standard costs for January have been? What were the total actual costs that the company incurred in January? Compute the total cost variance for the month.

3. Compute the direct labor rate and efficiency variances for policy support staff and policy sales persons.

4. Compute the variable and fixed operating overhead variances for January.

5. Identify possible causes for each variance and suggest possible solutions.