Headquarters’ Overhead Cost Allocation at Korea Auto Insurance Co. Inc Analysis

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1. Problem:
Incorrect overhead allocation method
2. Cause:
Internal: Incorrect method adopted
External: Owners are mandated to purchase the liability insurance, economic growth; restrict by government (heavy regulation)  low autonomy
3. Influence: Target become hard to be reached, low incentives, wrong decision shall be made
4. Conclusion: Replace the current method with an alternative method: relative i.e. using costing method which have different bases for respective overhead generated from departments to allocate overhead

Opportunity: Market growth; Go
Kim’s 策略:cut cost The approaches that Kim has taken
But finally result: doesn’t match expectation
2. Problem
Measures that Kim took (eg cut off
…show more content…
The government-driven economic obviously increase the revenue overall and ensure the company to maintain it operation.

Apart from the opportunity, a new capable manager with high reputation was transferred to be the manager in this branch. He made great and effective efforts to decrease the costs by cutting non-value added activities. He cut the staffs to the half from 82 to 45 especially in the information technology team and the general administrative team, and tried to cut the cost in the operating supporting team by minimizing the number of traffic accident and avoided handling high-risk customers.

Surprisingly, the performance did not match with the high expectation from the operation report and financial statement of the Taejon branch finally. Although the revenue dramatically increased by 22%, the net income only increased by 14% which made it much lower compared to the previous period.

But why cost, the overhead cost increased shown on the report?

As I have mentioned, government set heavy regulation which over protected the industry and weaken the competition, and more importantly make the company lack operating autonomy, thus it tend to adopt the easiest and less controversial cost allocation method by distribute the cost proportionately to the revenue that the branch generated regardless of the differences in the cost structure of each branch in the process.
And as the

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