Best cost allocation method

Topics: Cost, Economics, Cost accounting Pages: 2 (448 words) Published: October 5, 2013
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The reading text is about the unfair headquarters’ overhead cost allocation method of Korea insurance company. There are concerns towards the system by a manager. And that lead to reduce on net income of branches. Jin Kim is trying to develop more efficient systems.

The reading text is about the headquarters’ cost allocation method of Korea insurance Co. Inc. Jin Kim, manager of the company, accused that the costing systems is inefficient as it leads to decrease in incremental cost inappropriately and discourages employees to reach the common goal of maximizing profit. It is claimed that the heavy regulations towards the insurance industry by government, put pressure on many financial companies. As a result, many of them tended to adopt least controversial cost allocation policy without considering managerial problems in detail. Jim Kim implemented several policies to generate higher return and less cost, yet there is still room for development of a better system.

1. What is the headquarters’ cost allocation method?
2. What are the concerns of the branch manager?
3. Why is the change of cost systems necessary?
4. How should the cost systems be adjusted?
5. Any difficulties encountered when implementing new system? 6. Who is/are the stakeholder(s)?
7. What criterion does the current system use to allocate overhead costs to branches? Why? 8. How does this effect branches?

Exhibit 1 illustrates the cost structure of Korea Auto Insurance Co. Inc. Direct costs accounted for about 60 per cent of total costs while indirect costs accounted for about 40 per cent of total costs. Direct costs consisted of both operating costs (48 per cent) and admin….. 2-

Kim, however, realized that expansion of the branch might penalize him and branch employees by not...
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