Korea Auto Insurance Company Essay Example

Korea Auto Insurance Company Essay Example Korea Auto Insurance Company Essay Korea Auto Insurance Company Essay Headquaters Overhead Cost Allocation at Korea Auto Insurance Co. Inc. Korea Auto Insurance Co. Inc. For periods 2007 thru 2008 Question 1 Net Income, revenue, direct, and indirect costs using current method / Net Income, revenue, direct, and indirect costs using cost drivers. Question 2 Do you agree Kims performance in 2008 would now be evaluated more properly? Question 3 Which cost drivers make the biggest differences between net incomes? Do these cost drives have anything to do with Kims efforts in 2008? The largest difference when comparing the current allocation method and the activity-based costing method is the Operations Support. The new method takes into account the affect in the reduction of employees that Kim instituted. In this case sales training and employee based activity | |costs have been reduced at the Tajeon Branch in direct relation to the number of employees rather than the revenue generated. This way the branch| |is not penalized for the efficiency of less employees. Question 4 The ABC method matches specific reasonable cost drivers with corresponding overhead costs. Discuss why the ABC method would reward a manager with higher motivation in a competitive market. Also, discuss the shortcomings of the ABC method at the level of the entire organization. The ABC method would reward a manager with higher motivation in a competitive market because the way the ABC method is constructed where it can properly estimate the costs that are associated with products and services provided by the company. In Kim’s case the ABC method can identify the resources and support that the Taejon branch uses; and then in turn the Taejon branch can provide a justifiable reasoning on why the allocation of the overhead costs is not properly correlated to the use of the resources that the headquarters assigns to the Taejon branch. Kim is cost conscious and motivated to improve the company. In his tenure at the Taejon branch Kim implemented a two-fold cost reduction method in the cost of handling traffic accident cases, which, is the company’s largest proportion of the total overhead cost. First Kim used public relations and campaigns throughout the year to prevent customers from being involved in accidents. Second Kim also tried minimizing the number of high-risk drivers that his branch handles through de-marketing. All of Kim’s efforts lowered the number of accidents in the Taejon branch from 54 cases to 31 cases in one year. This is a reduction from Taejon’s customers being responsible for 11% of the accident cases in 2007, to less than 6% of the accident cases in 2008; where the overall accident cases for the company as a whole rose in 2008. Kim was also able to add value to the company. Kim was able to reorganize and analyze the Taejon branch, and as a result he was able to reduce his employee count from 82 down to 45 a year after taking charge. This reduction in employees directly correlates to the cost of employee training conducted by the IT team, the cost of sales training by the OS team, less payroll cost, less performance evaluation cost, and education of those employees. The shortcomings of the ABC method when applied to the entire organization can show signs of inefficiencies, thus can hinder a large organization such as the Korea Insurance group. The added cost of tracking the data for costs can really hurt a large organization since every activity that brings cost and revenue would have to be accounted for. In a smaller branch such as Kim’s Taejon branch, on a micro scale keeping a book of all transactions is simple because the amounts of transactions are low. At headquarters to apply cost analysis to support can be very complex and require a lot of man power to input data into automated cost programs and can be very time consuming if each cost detail is taken into account. It will also be very difficult to understand what cost goes where.