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INTRODUCTIONGreg 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 will be to analyze the product costing process and make necessary corrections.Greg is a CMA®(Certified Management Accountant) and CPA (Certified Public Accountant) with an undergraduate degree in accounting and a Master of Business Administration (MBA). Although he has worked in various roles with progressing responsibilities throughout his 12-year career, Greg has never been directly responsible for expense allocations. He has read numerous articles on the current applications of cost accounting techniques in service industries, including activity-based costing (ABC). He believes that he has a good understanding of cost accounting techniques and is eager for his team to improve the expense allocation process.COMPANY OVERVIEWAXE Life Insurance Company is among the leading life insurance companies in the United States. AXE Life employs more than 5,000 people and has assets in excess of $17 billion and annual premiums (“revenue”) in excess of $10 billion. The company is well established with a long successful history.AXE Life sells individual life insurance products, individual annuities, and group annuities. The individual products, both life and annuity, are sold through insurance agents. The group annuity products are sold by banks and brokerage firms. The group business represents approximately 40% of total sales, and the individual business represents the remainder. The company continually develops new products, both life and annuity, typically bringing one or two new products to market each year. The company currently has 17 different life and annuity insurance products. AXE Life has a functional organization structure with Sales, Marketing, Finance, IT, and Service departments representing a functional discipline. The Service department has a joint management team but has separate functions to service annuity products and life insurance products. All other departments provide support to both life and annuity products. Because of the size of the functional departments and their annual expense budgets, there are financial support roles in each department. The financial support staffs provide budgeting and financial analysis support to the departments. LIFE INSURANCE TERMS, PRODUCTS, AND PROCESSESThe two primary types of products sold and serviced by life insurance companies are life insurance and annuities. These two products have different characteristics. In general, life insurance is used for financial protection and annuities IMA EDUCATIONAL CASE JOURNAL VOL. 7, NO. 3, ART. 1, SEPTEMBER 20141ISSN 1940-204XProduct Costs: Application in an Insurance CompanyScott McGregorWestern Connecticut State University
for retirement savings. A life insurance policy provides a