This Case Study Is About the Korea Auto Insurance Company.

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This case study is about the Korea Auto Insurance company. In this case study the branch manager of the Taejon city is frustrated as he saw that though the net income increased in the year 2008 than 2007 but he also saw that the costs are also going higher. He did a detailed study of the total costs and cost allocation during these two years. He saw that the company is using Volume based allocation process for cost by using revenue to decide the cost allocation. He saw that there a lot of inappropriate cost allocations in this method. So he thought of using the ABC method for the cost allocation and hence finds out what would be the overhead cost of the Taejon branch after that.

Net Income1.

• Taejon Branch Net Income 2007:

Total Revenue: \$23.60 million

Total Cost: \$12.60 million

Net Income = \$23.60 – \$12.60 million

Net Income =\$11.00 million. (1.1)

• Taejon Branch Net Income 2008:

Total Revenue: \$33.20 million

Total Cost: \$17.70 million

Net Income = \$33.20 – \$17.70 million

Net Income =\$15.50 million (1.2)

Now the total revenue of Taejon Branch in 2007 is \$23.60 million.

Direct Cost of the Taejon branch in 2007 is 60% of its total cost i.e. \$12.60 million which is \$7.56 million. Indirect Cost of the Taejon branch in 2007 is 40% of its total cost i.e. \$12.60 million which is \$5.04 million.

Now the total revenue of Taejon Branch in 2008 is \$33.20 million.

Direct Cost of the Taejon branch in 2008 is 60% of its total cost i.e. \$17.70 million which is \$10.62 million. Indirect Cost of the Taejon branch in 2008 is 40% of its total cost i.e. \$12.60 million which is \$7.08 million.

2. The current overhead cost driver has lots of inappropriate allocations of costs. In volume based allocation process, the costs were allocated by using revenue as the allocation process which is actually wrong. So here by using the ABC method of the cost allocation, we calculate the Overhead cost of the Taejon branch in the years 2007 and 2008. The following table shows the allocation of the cost according to ABC method in the year 2007 and 2008.

 Team Activity 2007 2008 IT Team Branch PC maintenance \$0.41 \$0.32 Headquarters IT system support 0.04 0.11 Branch IT system support 0.5 0.76 Employee training 0.32 0.15 Total \$1.3 \$1.3 OS Team Training of sales people \$0.34 \$0.48 Operating performance evaluation and reporting 0.11 0.07 Handling traffic accident cases 1.23 0.95 Total \$1.7 \$1.5 GA Team Payroll administration \$0.11 \$0.05 Performance evaluation 0.12 0.07 Education and training 0.33 0.19 Branch building maintenance 0.46 0.48 Total \$1.0 \$0.8

So the total overhead cost for Taejon branch in 2007 is \$4.03 million and in the year 2008 it is \$3.6 million.

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