ACCT Internal Report
ACCT Internal Report
Korea Auto Insurance Co. Inc. is one of the largest liability insurance companies in Korea. In the mean time, the Taejon City branch experience severe competition and make efforts to capture greater market share. However the current overhead allocation system is based on revenue amounts which penalize the branch performance. A direct proportional overhead allocation method should be set in order to provide employee higher incentive and more appropriate resource allocation. This report will identify problems of the current overhead allocation method and suggest an alternative to instead.
One of the major problem is that the current overhead allocation method penalize branches performance. The current method allocate the headquarters' overhead costs according to the amount of revenue each breach generated. Some branches are allocated a larger portion of overhead due to high amount of revenue, however they do not receive a relative amount of headquarters' resources. Some branches have to bear the cost of resources of headquarters and other branches, but do not benefit from it, and it leads to serious inefficient resources allocation.
Apart from resources allocation, the current method also affect the net income. For example , the revenues of Taejon City branch raise 40% from 2007 to 2008, however due to the current overhead allocation, Taejon City branch is allocated a relatively high overhead cost from the headquarters which increase. As a result, the increase in operating costs are much higher than the revenues, the net income is finally much lower than the prior year even the revenues have shape increase. Although the branches performance is better, it cannot reflect on the net income. It shows that current overhead allocation method hinders the expansion of the branch and the branch is unlikely to reach the target of greater market share.
In addition, the cost cutting effort of branches become useless under this costs allocation
Korea Auto Insurance Co. Inc. is one of the largest liability insurance companies in Korea. In the mean time, the Taejon City branch experience severe competition and make efforts to capture greater market share. However the current overhead allocation system is based on revenue amounts which penalize the branch performance. A direct proportional overhead allocation method should be set in order to provide employee higher incentive and more appropriate resource allocation. This report will identify problems of the current overhead allocation method and suggest an alternative to instead.
One of the major problem is that the current overhead allocation method penalize branches performance. The current method allocate the headquarters' overhead costs according to the amount of revenue each breach generated. Some branches are allocated a larger portion of overhead due to high amount of revenue, however they do not receive a relative amount of headquarters' resources. Some branches have to bear the cost of resources of headquarters and other branches, but do not benefit from it, and it leads to serious inefficient resources allocation.
Apart from resources allocation, the current method also affect the net income. For example , the revenues of Taejon City branch raise 40% from 2007 to 2008, however due to the current overhead allocation, Taejon City branch is allocated a relatively high overhead cost from the headquarters which increase. As a result, the increase in operating costs are much higher than the revenues, the net income is finally much lower than the prior year even the revenues have shape increase. Although the branches performance is better, it cannot reflect on the net income. It shows that current overhead allocation method hinders the expansion of the branch and the branch is unlikely to reach the target of greater market share.
In addition, the cost cutting effort of branches become useless under this costs allocation