The Korea Auto Insurance Co Inc. case study presents an illuminating and interestingly scenario on how cost allocation plays a role towards the overall assessment of the branch performance. Ideally, the contest in the case study relates to the use of the traditional cost allocation method which is pegged on the revenue amounts against the currently popular activity based cost allocation which considers unique cost drivers for unique situations. This paper seeks to discuss the contest in the context of the Taejon Branch under the able leadership of Jin Kim. The paper shall employ the SWOT analysis approach in the discussion.
One must appreciate that Korea Auto Insurance, like any other business concern, had its own strengths and weaknesses and was equally in an environment with opportunities and threats. Ideally, in overall, one notices that the scales were titled in favor of the concern for the strengths and opportunities outweigh the weaknesses and threats.
Some of the strengths the business had include the personnel base, the ERP based on the integrated information technology and the fact that the firm was one of the largest in the liability insurance industry. The strength in the personnel was in their experience and resourceful nature. For instance, the branch manager, Jin Kim, was one of the promising employees of the firm who was expected to grow into becoming one of the senior chief executives. In addition, it is reported that the headquarters had supplied the branch with adequate numbers of marketing personnel The Enterprise Resource Planning is a unique information technology platform that facilitates efficiency and efficacy in business operations. That Korea Auto Insurance Co. had since implemented the same placed it in a strategic position to rake in profits from the blossoming market. Lastly, the enormous size of the entity and its popular brand in the country in itself facilitated marketing and increased overall revenue transactions.
On the other hand, Korea Auto Insurance Co. was wrought with weaknesses. One striking weakness is the overhead allocation method in application which in essence punished the branches with higher revenues. This blind approach to overhead allocation had the net effect of poorly assessing the performance of the branches. A typical instance is seen in Taejon branch situation where despite increased revenue volumes, the total closing book profit is lower than that of the previous year. This traditional approach equally places too much premium on the revenues as a cost driver without interrogating the main causatives of the costs incurred. Other weaknesses are seen indirectly in the patronizing government in terms of regulations which leads to a low key managerial approach. This is manifested in the simple overhead allocation that proves misleading as a branch performance indicator.
In the same breadth, the company had opportunities and threats. Opportunities include the growing population in the Taejon City coupled with infrastructural development which necessitates insurance services, the fact that liability insurance is compulsory and, therefore, consumers have no choice and lastly the fact that the auto insurance is the most popular form of insurance. All the mentioned opportunities have the overall effect of availing a market to the company. This ready market needs to be targeted if the company is to meet its profit objectives.
On the other hand, the threats can be seen in the competitive auto insurance industry. The fact that the market was blossoming attracted several players. In that vein, mal-performance in terms of quality of the services would easily occasion an exodus of the consumers to other insurance providers. This competition poses a threat in that the company often has to be on its toes.
In conclusion, it is the position of this paper that the Taejon branch can only do better. The overhead allocation system needs to be adjusted to reflect modern managerial practices. An activity based cost allocation method that is alive to the relevant cost drivers is preferable.
Banks, E. (2010). Finance: The Basics. New York: Routledge.
Kim, S., Lee, H.-Y., & Choi, W.-H. (2009). Headquarter's Overhead Cost Allocation at Korea Auto Insurance Co. Inc. Ontario : Ivey Management Services .