Management Accounting Case Book

Product Costs: Application in an Insurance Company

Scott McGregor, Western Connecticut State University

COST ACCOUNTING TEXTBOOKS TYPICALLY FOCUS ON manufacturers and provide less emphasis on applying cost accounting practices in service companies. But understanding the costs to sell, produce, and administer products is extremely important in both service and manufacturing industries. Many service companies, such as banks and insurance companies, have very large administrative functions and use cost accounting principles as a means to understand costs and to improve cost effectiveness and profit margins. The case is based on an actual project that updated the product cost allocation process at a large insurance company (case uses a fictional company name and accompanying data).

The case is designed to be used in an undergraduate cost accounting course. The case may also be used in an undergraduate or graduate management accounting course.

Keywords: cost allocations, product costs, activity-based costing (ABC).

Product Costs: Application in an Insurance Company

Scott McGregorWestern Connecticut State University

INTRODUCTION

Greg McAndrews has recently been hired as Vice President for Expense Management at a large insurance company. His responsibilities include the process for allocating expenses to products. Through discussions with his staff, he has learned that there is a great deal of discontent with the expense allocation process. He decided that one of his top priorities ...