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

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Case Study Questions:

 

What would be the net income of the Taejon branch as of 2007 and 2008 if the headquarters’ overhead costs were allocated by the current method? Calculate the amounts of revenue, and direct and indirect costs of the Taejon branch for these two years.

The current overhead cost driver, branch revenue, is criticized because it lacks any logical relationship to the overhead costs allocated by headquarters. Choose more appropriate cost drivers for the 17 overhead costs listed in case Exhibit 3. You may refer to the descriptions of the 17 overhead costs incurred by the five teams at the headquarters.

The ABC method matches specific reasonable cost drivers with corresponding overhead costs. Discuss why the ABC method would reward a manager with higher motivation in a competitive market. Also, discuss the shortcomings of the ABC method at the level of the entire organization.