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Case Analysis Gibson Final

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Executive Summary

Name of Case:Gibson Insurance Company

Problem definition: State the central issue in the case, as well as related minor issues. The central issue is the inefficiency in allocating cost for each product. This is because the existing support cost allocation method does not reflect its relative claim on the resources and thus, leads to insurance products being priced inaccurately in the company. Some of the minor issues include inefficiency in resource allocation and pricing decisions. Moreover, the profit figure has been decreasing although the sales volume increased. The corporate support cost has also been increasing alarmingly to sustain company’s growth since the recent acquisitions took place. Another issue would be inefficient and less streamlined processes in the company which leads to repeated steps and incurrence of additional costs.

Recommendations: State your overall aim, the specific actions to implement it, and how these actions will add value and/or save costs for the organisation. Our overall aim is to introduce an efficient cost allocation method to improve pricing accuracy of products. This can be done by first; adopting activity based costing (ABC) method as suggested by Hampton instead of the existing simple costing method in the company. ABC recognizes the relationship between activities, cost and products which helps to allocate cost per unit to products more accurately. The main activities that run the business must be identified and analyzed to determine cost driver for each activity. We agree to the four major activities suggested by Hampton however, disagree on her cost allocation basis as it does not seem to be practical and accurate. For example, customer service cost should be allocated based on the number of call minutes instead of number of incoming customer calls as it is more accurate and as for the policy acquisition, the number of steps involved in processing the policy should be replaced by number of labour hours in moving new policy applications to an in-force status. Thus, the allocation basis should be reviewed again based on the general ledger and replaced with more accurate basis. This would add value to the company by allowing efficient pricing allocation to create a competitive advantage in the market. It also helps the company to determine products that generate higher profit and allows more focus to be put on them to improve the company’s profitability.

Alternatives: State alternative actions and plans that were considered and why there were rejected in favour or your final recommendations. Alternative action considered is to separate the management of support activities of the respective companies instead of having Gibson to provide the services to all three companies. This means that Midwest and Compton will prepare their own cost accounts using the same new cost allocation basis employed by Gibson. It would be easier to track the costs of each company’s product and its profitability. Plus, it reduces the complexity involved in calculating the cost with Gibson doing it alone. However, this plan is rejected as the separation of management would results in higher operation cost as new equipments and accounting software need to be installed. It would also require hiring of additional staffs and training needs to be provided. This directly leads to higher cost, increased time consumption and overall results in inefficient use of resources

Analytical Support

Numerical support: Show key evidence that informed your recommendations, e.g. additional calculations and/or numbers presented in the case. State their relevance and significance for your recommendations. Focus on the Strategic Management Accounting technique from the week’s lecture. Summary of total support cost per policy using activity-based costing (ABC)

Annuities
Life-Insurance

New
In-Force
New
In-Force
Policy acquisition
$84.40
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