Essay About Better Allocation Of Costs And Cost Improvement.Key Problem

Gibson Insurance Company Case Analysis
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Gibson Insurance CompanySummary         The Controller, Rebecca Hampton has been placed in charge of implementing a new management planning and performance system.  The better allocation of costs would help management to have a more accurate view of product profitability as well as provide a more in-depth understanding of product pricing decisions and sales agent compensation, plus highlight areas for cost improvement.Key Problem(s)System of cost allocation was inadequately allocating cost and resources. For example, as we see in Exhibit 1 that the calls taken for new policies by customer service (0.5) is more than the in-force policies by customer service (0.2). However, higher dollar value is required for the in-force policies for assets under management/corporate overhead ($4,295,000,000), and lower is recorded for the new policies ($992,000,000). This justifies uneven allocation of resources. [pic 1]Another issue is decreasing profitability and that is due to the inefficiency of the processes Gibson is using, for example, Gibson has hidden cost of the product which is setting the price of its products incorrectly, these are the resources that are not distributed adequately. Using old method, Midwest has $4,038,341 in total support costs, while Gibson has $4,781,457 and Compton has $5,100,202 totaling $13,920,000, as showing in Exhibit 5.[pic 2]Both the above listed issues are affecting the books and profitability is suffering at larger scale.          Possible Solution(s)Improved and proper allocation options by collapsing 50 corporate cost accounts into 4 categories that will allow a more precise understanding on product cost-effectiveness and make accurate product pricing decisions.  It will also support cost management by detecting the specific cost items attributable to each product. For example, with the implementation of new method of allocation, there will be more accuracy in the cost and the new cost drivers will be able to simplify the processes at a lower cost.From the aspect of assigning cost centers, tracking information of cost expenses would assist management to measure productivity without bias in respect to cost driver. In operations, departments such as the marketing or human resource, are not directly creating revenues. They provide their competencies for internal support and help sales department to bring profits to the company. Those exertions are a part of product costs and it is a standard for performance assessment. Thus, managers need to recognize how many services each division offers and additionally know how much they affect overall cost. Therefore, through tracking, the resources are controlled throughout the project; managers can control product costs and use fairly appraise employees’ performance.Also, this innovative provision in cost allocation can help Gibson Insurance Company establish improved evaluating parameters for the annuities and life insurance because it assigns costs based on the proper cost items incurred by each product. Determining activity cost pools and the costs earned by each product in these activities will categorize the true cost of the product.  This will be a suitable benchmark for pricing decisions by management. Through the comprehensive investigation by Hampton, the new support cost allocation information helps Gibson Insurance establish better pricing guidelines for the various annuities and life insurance products sold by each legal business unit entity. There are several reasons contribute to this conclusion: First, the new support cost allocation information offers more accurate information of costs. The management can allocate the costs more rational by using cost allocation by support activities. Second, as shown Exhibit 2, the support cost for each policy is different with the original allocation method. For instance, the new allocation bases of annuities new policy costs are $221.52, which is much higher than the cost of in-forced policies. [pic 3]This is also seen in the Life Insurance product line shown in Exhibit 3:[pic 4]The result of support cost by policy reveals a phenomenon that different policy involves different level of working procedures. For example, as shown in Exhibit 4, the total cost $13,920,000 is a sum of $4,375,000 in policy acquisition cost, $2,426,000 in customer service cost, $4,552,000 in sales and marketing cost and $2,567,000 in AUM, and these calculations are being done using the new and improved cost allocation method. This also resulted in the support cost for new policies are greater than in-force policies in general. This new system also allows the company to cut the cost where it has been used increasingly and utilize the resources adequately. New system will also provide the company with unit cost for each of the cost drivers, for example, as shown is Exhibit 4, $42.20 per step, $44.06 per customer service call, $10.02 per sales and marketing and $0.0003 in other corporate support. Hence, it is true that there are so many advantages cost wise by using the new method of cost allocation. Also, if training will be provided to the employees on using the new method of cost allocation, this will help save time and money.