Korea Auto Insurance Case Essay

653 Words3 Pages
Korea Auto Insurance Co. Inc. should consider modifying the current overhead cost allocation process to distribute resources equitably and reflect operating performances of each branch accurately. In particular, the revenue-based overhead cost allocation is neglecting differences in the cost structure of each branch and are thus penalizing those generating more revenue, such as the Taejon branch. The issue have been brought up recently by some branches claiming their earning targets are too difficult to achieve due to the over-heavy overhead cost. While dwindling the headquarters’ indirect cost might be a solution to address such appeal, it is more significant for the top management to reexamine the relationship between headquarters activities and branch operations to modify the current allocation method. The case of Taejon branch elaborates the essentiality of such modification. In 2008, Taejon branch achieved a remarkable 40% revenue growth, which is three times more than that of the whole company (12%). Meanwhile, it made great effort saving the company’s expenditure. Taejon reduced its number of PCs whereas the entire company had a 14% increase. It also reduced its employee scale by 50% while 105 new recruits were hired by other branches. By successful de-marketing strategies, the branch reduced 43% of traffic accidents handled (54 to 31) and thereby the insurance claims, but the same entry was the fastest-growing and largest portion of total indirect cost at the headquarters the same year. In other words, Taejon’s revenue growth cannot indicate a proportional increase in cost generating or resources consumption from the headquarters. Under the current revenue-based process, its cost reduction effort was not rewarded with lower overhead allocation, but increasing financial responsibility as the company’s indirect costs expanded from 2007 to 2008.

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