Internal Report on Problems Related to Overhead Allocation Method: Korea Auto Insurance Co. Inc. Case Study
Internal Report on Problems Related to!
Overhead Allocation Method!
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Jin, Kim,!
Manager of the Taejon City branch of Korea Auto Insurance Co. Inc.!
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To improve the cost structure of the branches and provide positive incentives for our company
to expand, the top management should consider adjusting the volume-based overhead costs allocation method. It is causing branches such as Taejon City Branch suffer from a number of problems. This report will reveal the problems and provide insights on how to solve them. !
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An inappropriate overhead allocation method can be fatal to the financial situation of the branches. Take Taejon City branch as an example, in 2007, the overhead costs allocated was $8.5 million, accounts for 33% of its total costs. In 2008, when performance improves, it nevertheless received $13.1 million, accounts for 45.1% of the total costs. This percentage is far too high for a branch in the sense that total overhead cost is only 40% of the total cost of the whole company. It caused difficulties on achieving earning targets, and further caused the branches to lose their incentives to expand because it will be penalized for doing that.!
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Considering the situation of our company, the cost driver of different overhead costs is different and might not be treated evenly. Actually, among all the overhead costs, only HQ and branch IT system support costs, costs of investing cash are actually proportional to the revenue. For other costs, some of them can be allocated equally among the branches, such as costs of investment performance evaluation and reporting, preparing operating report and advertisement costs, because they do not have much to do with the performance of branches. Situation is different for the cost of handling accidents. The Taejon branch is allocated 33.7% more costs compared to last year. However, this number should be lower considering the efforts of cost saving. It will be 26.0% lower if we allocate this cost according to
Overhead Allocation Method!
!
!
Jin, Kim,!
Manager of the Taejon City branch of Korea Auto Insurance Co. Inc.!
!
To improve the cost structure of the branches and provide positive incentives for our company
to expand, the top management should consider adjusting the volume-based overhead costs allocation method. It is causing branches such as Taejon City Branch suffer from a number of problems. This report will reveal the problems and provide insights on how to solve them. !
!
An inappropriate overhead allocation method can be fatal to the financial situation of the branches. Take Taejon City branch as an example, in 2007, the overhead costs allocated was $8.5 million, accounts for 33% of its total costs. In 2008, when performance improves, it nevertheless received $13.1 million, accounts for 45.1% of the total costs. This percentage is far too high for a branch in the sense that total overhead cost is only 40% of the total cost of the whole company. It caused difficulties on achieving earning targets, and further caused the branches to lose their incentives to expand because it will be penalized for doing that.!
!
Considering the situation of our company, the cost driver of different overhead costs is different and might not be treated evenly. Actually, among all the overhead costs, only HQ and branch IT system support costs, costs of investing cash are actually proportional to the revenue. For other costs, some of them can be allocated equally among the branches, such as costs of investment performance evaluation and reporting, preparing operating report and advertisement costs, because they do not have much to do with the performance of branches. Situation is different for the cost of handling accidents. The Taejon branch is allocated 33.7% more costs compared to last year. However, this number should be lower considering the efforts of cost saving. It will be 26.0% lower if we allocate this cost according to