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

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Graduate School of Business

Sw
9B09B014

HEADQUARTERS’ OVERHEAD COST ALLOCATION AT KOREA AUTO
INSURANCE CO. INC.

Sangil Kim, Professor Ho-Young Lee and Professor Won-Wook Choi wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2009, Ivey Management Services

Version: (A) 2009-10-22

In January 2009, Jin Kim, manager of the Taejon City branch of Korea Auto Insurance in South Korea, was frustrated. Taejon City had grown rapidly since the Korean government started moving key central government offices to the city in 2005 and developing large industrial and residential areas around the city. Many private and public research institutions had built laboratories in a suburb of Taejon City. Auto insurance companies had opened numerous branches to capture new customers. As a result, the Taejon City branch of Korea Auto Insurance Co. Inc. had experienced severe competition and made efforts to capture greater market share in the region.

After preparing the operations report for the previous year, Kim realized that his branch’s performance was not as good as expected, primarily due to the way cost accounting systems operated within the company. The current cost accounting systems penalized branches that generated more revenue during the fiscal year. Korea Auto Insurance Co. Inc. was one of the three largest liability insurance companies in Korea. Selling auto insurance policies was its primary service. The company had allocated overhead costs incurred at the headquarters across operating branches under a traditional volume-based allocation process. Overhead costs included resources spent by the headquarters for information technology services, general administration and marketing activities. The problem was that the headquarters’ overhead costs had been allocated to branches according to the amount of revenue each branch generated. Differences in the cost structure of each branch were not considered in the process. As a result, some branches were allocated a large portion of overhead, but felt they had not benefitted much from headquarters’ resources. Some branch managers had complained about the current allocation process of overhead. They argued that their earnings targets were unlikely to be reached, solely because of the inappropriate cost allocation process the company had applied.

For use only in the course Cost Managment at Dalhousie University taught by Jim Power, from Jan 4, 2012 to Apr 5, 2012. Use outside these parameters is a copyright violation.

Yonsei University

9B09B014

CONCERNS AS A NEW BRANCH MANAGER

Kim was transferred to the Taejon branch in 2008. He was considered a key player in the Strategic Planning Department at the headquarters before being transferred to the branch. He had been involved in major business projects and gained a reputation for his ability to plan and budget. In 2007, he successfully directed a three million dollar project establishing an enterprise resource planning (ERP) system for the entire company. He was expected to be promoted to an executive officer position eventually. Transferring Kim to the Taejon branch was a favor from the top management intended to give him an opportunity to gain field experiences at the branch level,...
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