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Cost Accounting – I

Notes 14. ………………… is based on the assumption that the price of the next consignment is known
before it is received.
15. ………………… involves considerable work of finding out the replacement price at the
time of each issue.



Case Study Activity Based Costing Implementation –

Sun Life Insurance

by Jim Gurowka

Background
Sun Life Insurance is an international insurance company, providing individual and
corporate life insurance, group retirement services and benefit management services.
The Canadian operations have offices located throughout Canada, with the head office in
Toronto.
The Group Claims division provides drug and dental claim management and claim
adjudication to companies in Canada through its four main centres in Toronto, Ottawa,
Edmonton and Montreal. Clients include the Federal Government, City of Toronto, Royal
Bank of Canada and Magna International.
Business Issues
Several issues have led Sun Life to undertake the implementation of an Activity Based
Costing (ABC) analysis. Increased competition, the introduction of new computing
technology, and increasing client demands have caused margins to decrease and costs to
rise. The increased costs and decreased per unit revenue have pressured management to
seek to reduce costs significantly to maintain profitable operating results.
Competition and customer demands have forced the organization to dramatically reduce
the length of time to process a claim, while also increasing the due diligence performed on
each claim. Each processing center performs tasks using different operational processes,
and standards with greatly differing processing times for various types of claims. The
organization needs to identify the best practice for each process, and institutionalize that
best practice across all their operations.
To make management and strategic decisions, senior management decided that a better
set of decision-making tools were needed in the group claims division. This includes better
costing information and better performance data.
Approach
Focused Management Information was engaged to assist the Group Claims division
implement and internalize an Activity Based Costing system, and then tie it in to best
practice analysis, process improvement and budgeting.
A cross-functional team of eight Sun Life employees representing all locations, including
group finance, was formed and guided through the implementation process and the data
collection with the ongoing assistance of FMI. After a thorough training on ABC concepts
and implementation methodology, the team conducted activity analysis on all positions in
the group claims area and then created a consolidated activity dictionary and Cost Flow
Diagram, which represents all activities and processes within the area, as well as maps
Contd…

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