Gibson Insurance Company
Gibson Insurance Company (GIC) faces a challenge during the current year. GIC’s current cost allocation system must be revised to accommodate the implementation of a new management planning and performance management system. The goal is to better allocate GIC’s corporate support-service costs to the business lines and business units in a result of more precise pricing strategies, sales compensation and improved cost control.
We have analyzed GIC’s situation based on the given information, and concluded with a solution to improve the old cost allocation system. The new cost allocation uses adjusted cost bases which better reflects to the actual usage for new and existing policies. More support-service costs are assigned to new …show more content…
Problem might occur when one of the firms uses many resources in running various marketing activities but results in low sales volume and the costs will be allocated incorrectly to other firms which have better sales performance. As for other corporate overhead cost, it is allocated according to the valued of assets under management (AUM). This allocation base does not truly reflect the overhead costs consumed by each business unit. For instance, one department may incur a large amount of overhead costs when it has required a significant amount of maintenance for its machinery. The machinery does not necessarily have a high market value. The business units which have a high value of AUM may not consume as much overhead resources as the units with lower AUM.
COST ALLOCATION IMPROVEMENT
The Importance of Effective Cost Allocation for Support Services
Many companies in all sectors allocate service department cost to user departments, and ultimately to the products and services that they provide. Most support-service departments such as Human Resource Department and House Keeping Department, do not engage in activities that will generate revenue. The performance of department managers cannot be accurately measured based on the profit or income of that departments. The performance evaluation at profit centers is based on the cost control at cost centers. Therefore, it is very important to have an effective cost allocation for support-service costs.