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Korea Auto Insurance Co. Inc.

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by

Ryan Io

on 7 October 2013

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Transcript of Korea Auto Insurance Co. Inc.

Korea Auto Insurance Co. Inc.

Part 1: Current Overhead Cost Allocation Method
Overhead Cost Allocation - Review and Analysis
Prepared and presented by: Jin Kim
Branch Manager
Taejon City

Agenda
Part 1: Current Overhead Cost Allocation Method
1.1 Overview
1.2 Comparison with Ideal Model
1.3 General comment and concern

Part 2: Problems and evidence
Short Term:
2.1 Inappropriate - The 5 Supporting Teams
2.2 Unfair - Linkage between Performance & Profit
Long Term:
2.3 Staff Morale
2.4 Firm Value and competitiveness

Part 3: Recommendation
3.1 Matching corresponding Cost Drivers
3.2 Activity-based Costing (ABC)
3.3. Cost and Benefit
1.1 Overview
Allocation of Overhead Cost
The Composition of Total Cost
Components of Indirect Cost
Note:

- Fixed Cost (will not vary)
- Known as Overhead Cost
- Incurred by :
The headquarter and 5 supporting teams:
1. IT Team
2. OS Team
3. Investment Team
4. Marketing Team
5. GA Team
Overhead Cost
(40% of Total Cost)
Branch A
Branch B
Branch C
- Volume Based Allocation Process

- By using Revenue as allocation basis
Part 1: Current Overhead Cost Allocation Method


1.2 Comparison with Ideal Model
Provide an accurate and reflective operating result

Appropriate managerial decision and performance appraisal

Part 1: Current Overhead Cost Allocation Method

1.3 General comments and concern
1. Provide inappropriate incentives
2. Inefficient resources allocation
3. Cannot accurately indicate actual O/H consumed



1. Hinder the productivity
2. Generate misleading information
3. Lower the firm value
In the Long Run
Part 2: Problems and evidence

Short Term:
2.1 Inappropriate - The 5 Supporting Teams
Problems associated with Supporting Teams
IT Team
Problem 1: Inappropriate Cost Driver
OS Team
Invetment Team
Marketing Team
GA Team
Problem 1: Inappropriate Cost Driver
Inappropriate
Problem 2: Regardless of Labor Cut

Labor Cut of employees from 82->45
Cost reduction from the part Employee training

Problem 3: Regardless of introduction of new IT system by Kim


New system boost operating performance
Reduce the need(cost) for branch IT system support

Problem 1: Inappropriate Cost Driver
Problem 2: Regardless of cost saving effort of Kim

Used campaigns throughout 2008 to prevent accidents.
Minimize the number of high-risk customers through de-marketing.
Number of accidents in the Taejon branch decreased from 54 cases in 2007 to 31 in 2008.
Reduce the cost in handling traffic cases

Problem 1: Inappropriate Cost Driver
Problem 1: Inappropriate Cost Driver
Problem 2: Regardless of Labor Cut

Labor Cut of employees from 82->45
Cost reduction from the admin work to employees :
Payroll, personnel evaluation and employee training

Part 2: Problems and evidence


Short Term:
2.2 Unfair - Linkage between Performance & Profit
There is an mismatch of performance with profit
Creating a "Penalizing effect" on branches that capture more revenue
Example: Taejon City Branch
Raise Insurance Revenue from 23.6 (2007) to 33.2 (2008)
Reorganization within the branch to minimize direct cost expense
Greater net profit should have been resulted
Yet, we recorded a lower net income than year 2007,
since we have to take a greater portion of O/H cost, even if we don't benefit much from it.
Insight
1. Effort is not recognized.
2. Create "penalizing" effect.
3. Generate inaccurate cost information
Part 2: Problems and evidence
Long Term:
2.3 Staff Morale

Discourage employees to work hard for profit
lack of incentive and motivation
Productivity would be severely hampered
Negative effect in corporate culture
2.4 Firm Value and competitiveness
Inaccurate cost information is being used in managerial level
Detrimental to competitive edge
Profit Yield would decrease
Loose its leading position within the industry
Part 3: Recommendation

3.1 Matching corresponding Cost Drivers

Review by showing amendments of cost drivers

3.2 Activity-based Costing (ABC)

Activity Based Costing (ABC):
is a costing methodology that identifies activities in an organization
assigns the cost of each activity by actual consumption

Introduce the new method
Usage: Over 50% of companies in the world use including insurance industry
Inappropriate and Unfair
In the Short Run
Part 3: Recommendation

3.3 Cost and Benefit
Benefits:
Identify and eliminate unprofitable or adjust over-priced product
identify and eliminate ineffective production or distinguished the product that with better yield
Cost
Time consuming

Increase administrative cost
Slow down the cost allocation method
Conclusion:

The current Overhead Cost Allocation method is:

1. Provide inappropriate incentives
2. Mismatch with profit and resources
3. Cannot accurately indicate actual overhead cost

Inappropriate and Unfair
May have undesirable implication in the long run
therefore, radical measurement should take place.
Thank You
The End
Full transcript