Case Study on Korea Auto insurance
Every company’s goal is to reduce costs in its operations. Some companies operate on high costs that can be reduced. Following the case study given, the manager of Korea Auto Insurance feels that the current cost allocation method in the company is inappropriate. We will suggest ways in which Korea Auto insurance can adopt to reduce their operational costs.
Kim, the manager, has realized that the most overhead costs have been allocated to operating branches. Certain headquarter costs have been allocated to the branches. Certain headquarter costs do not have to be allocated to any of the branches unless there was a direct relationship. Kim, in his letter to the management, analyzed that the headquarter costs have dramatically increased from $18.4 million in 2007 to $24.3 million in 2008. The overhead costs for the headquarters should be accounted for in the headquarters. This is one of the ways through which overhead costs can be reduced significantly. Costs for the headquarters should not be transferred to another place and vice versa. There could be manipulation of figures or such.
Kim has also analyzed the different departments and the relevant costs and how such costs can be reduced. The IT team, for example, has used various elements to determine the cost drivers for their activities. The branch PC maintenance, for example, is calculated according to the number of PCs. This cost has been determined to be quite high. The headquarters and the branch IT system support has been done according to the company revenue. The IT team had branch pc maintenance of $5.3 million in 2007 and $ 4.8 million in 2008. IT maintenance in the headquarters rose from 3.6 in 2007 to 7.7 in 2008. These costs can be observed to be high. I would suggest that the company adopts that the overhead costs for the IT department to be calculated based on revenue other than using single units like the number of units. Through revenue, it means that costs will be determined by the income that the business makes from the sale of goods and services to its customers. It will be very unreliable for the company to have high turnover costs even when the revenue is not high. The operating expenses of the company should go hand in hand with the revenue. This will help in maximizing the revenue and cutting down unnecessary costs in the company.
The general administrative expenses are another area that consumes huge costs. This has also been witnessed in Korea Auto Insurance Co Inc. Some of the activities that are in this sector include payroll administration, which is done according to the number of employees. Performance evaluation, education, and training are also conducted according to the number of employees. The general expenses need to be handled well because they do not translate to the sale of any products. From the example given, the overall expenses rose from $14.7 in 2007 to $15.7 in 2008. All the general expenses outlined in the example rose in 2008. This means that there is a need to cut costs. These are expenses that will always be there whether the company sells or does not sell. The headquarter building maintenance and branch maintenance have been done according to the revenue of the company. All the general administrative expenses must be based on the number of employees rather than revenues. This will help because using the number of employees us a highly accountable method. Using the revenue method to calculate the payroll can be misused by some employees to include ghosts and dummy workers.
The investment team can also adopt a universal way for all the investments. The number of branches in the company can be used as the cost driver. It is also vital to make wise investment decisions so that the company can maximize the best options in the market. Poor investment decisions can waste a lot of the company’s financial resources. For example, the comparison between 2007 and 2008 shows a drop in investment performance. Investment performance in 2007 was 0.8 while in 2007 it was 0.7. The overall investment cost was 11.8 in 2007 and increased to 12.5 in 2008. Despite the increase in investment costs, the performance of the investments dropped from 0.8 to 0.7. The debt from investment also rose from 3.6 in 2007 to 4.2 in 2008. This means that investments in the company are not performing well.