Gibson Insurance Company
10 Pages Posted: 21 Oct 2008
This case provides students with an opportunity to practice a set of activity-based costing calculations. More importantly, it provides an instructor with the opportunity to challenge students to think about and to discuss the rationale used by the case protagonist to revise the means by which the company allocates corporate support costs to the product lines and to the business units. It is best used as an introduction to activity-based costing and/or the more general topic of cost allocations. As such, it is effective for undergraduate and graduate managerial accounting courses, as well as executive education financial management programs.
Rev. Jun. 15, 2009
GIBSON INSURANCE COMPANY
Rebecca Hampton, the controller for Gibson Insurance Company, faced a challenging task at the end of the year. For the implementation of a new management planning and performance management system, Hampton had been asked to review the company's allocation of corporate support costs in order to better assign the costs attributed to product lines and business units. Better cost allocations would help management to obtain more accurate insight into product profitability, provide more in-depth information for product pricing decisions and sales agent compensation, and highlight areas for cost improvement.
Insurance premiums and sales commissions were tracked at the legal business-unit entity and product-line level to properly compensate sales agents. Certain support functions, however, were only accounted for at the corporate level and were subsequently allocated to product lines and business units according to the number of policies outstanding. Historically, this simple approach had worked well. With the number of recent corporate acquisitions growing, however, Hampton felt that such an approach did not reflect the claim on resources that was made by various business units and product lines. Moreover, although sales volume had increased over the last few years, profitability declined, causing management to become concerned that either the prices were set incorrectly or costs were out of control. It was time to create a new method. Hampton was sure that a new cost allocation approach would help the company improve its pricing and resource allocation decisions.
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Keywords: costing calculations, product lines, costing, cost allocations
Suggested Citation: Suggested Citation
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Gibson Insurance Company
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