Question

Process Activity Analysis for a Service Company

Columbia Insurance Company has a process for making payments on insurance claims as follows:

An activity analysis revealed that the cost of these activities was as follows:

Receiving claim	$40,200
Adjusting claim	120,600
Paying claim	40,200
Total	$201,000

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 6,700 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories. Claims under $1,000 and claims greater than $1,000: claims under $1,000 would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 70% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 5% to the "receiving claim" activity cost.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round the percents to the nearest whole number, if required.

Columbia Insurance Company
Individual activity cost to the total process cost
Activity	Cost	Percent of Total Process
Receiving claim	$	%
Adjusting claim		%
Paying claim		%
Total	$	%

b. Determine the average total process cost per claim payment, assuming 6,700 total claims. Round to the nearest whole dollar.
$ per paid claim

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. If an amount is zero, leave the entry box blank. Use the minus sign to indicate an additional cost in the last column.

Columbia Insurance Company
Changes in the activity costs
Activity	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Savings (Cost)
Receiving claim	$	$	$
Adjusting claim
Paying claim
Total	$	$	$

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 6,700 total claims. Round to the nearest cent.
$ per paid claim

Answer 1