Gibson Insurance Company Essay

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ABSTRACT Gibson Insurance Company (GIC) faces a challenge during the current year. GIC’s current cost allocation system must be revised to accommodate the implementation of a new management planning and performance management system. The goal is to better allocate GIC’s corporate support-service costs to the business lines and business units in a result of more precise pricing strategies, sales compensation and improved cost control. We have analyzed GIC’s situation based on the given information, and concluded with a solution to improve the old cost allocation system. The new cost allocation uses adjusted cost bases which better reflects to the actual usage for new and existing policies. More support-service costs are assigned to new…show more content…
Compton’s costs have increased by $1,348,365 because it sold more cases of new life insurances than the other two business units. Drawbacks of the New Support-Service Costs Allocation Even though the currently used direct method is simple and less costly in terms of implementation, it ignores the interactions among the service departments. For example, the Other Corporate Support may also provide services to the other three support-services cost centers. If managers of business units are not vigilant, the over-used support-services costs may be passed onto them in the form of higher cost allocations. Second, in terms of the allocation bases, the new approach has been improved tremendously from the previous system; however, there are still downsides to it. The new system allocates policy acquisition costs by the number of steps required to verify a new policy application. This neglects different costs associated with various procedures during verification. Certain procedures are more costly than others. By relying on the number of steps in allocating acquisition cost, the system cannot reflect the cost discrepancy of numerous procedures accurately. The new system also uses the number of incoming customer calls to allocate customer service costs. Customer calls vary in time as well as costs, so using the number of calls as the allocation base does
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