Accounting Internal Memo: Cost Allocation for Kai

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Last but not least, the current overhead cost allocation could also probably result in lack of working incentives for certain employees. As the overhead cost is allocated according to branch revenue, branches that have a relatively better performance would have to be exposed to a heavier burden of overhead costs. Taking Taejon Branch as an example, from year 2007 to 2008, the amount of revenues has considerably increased from $23.6 to $33.2, an increase of 40.68%. As a consequence, the allocated overhead costs from headquarters for Taejon branch have increased by 53.90%, which is much greater than the 40.68% mentioned before. This actually resulted in a deficit in Taejon branch last year despite the remarkable increase in revenue. Similarly, those well-operated branches might find a surprising decrease in profits instead. Without achieving the expected result, there is some possibility that the employees would experience a decrease in confidence and working incentives, as they may mistake the current cost allocation system as penalizing some of the outstanding branches.

It is very likely that these and some other similar profits-concerned issues could partially be solved by considering adopting a more appropriate cost allocation method to have a clearer evaluation of branch performances. Some branches are currently experiencing difficulties in reaching earning targets, and could be suffering from unnecessary worries and complaints later on. I am very willing to deliver my observations and ideas more comprehensively at the annual board meeting, as an initial attempt to understanding the possible widespread dissatisfaction among employees and tense working atmosphere that KAI might be experiencing. Such alterations if implemented immediately can contribute to KAI’s long-term prosperity and maintain its prominence position in the Korean insurance market.

Yours sincerely,

Jin Kim

Taejon Branch Manager

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1 Steven Bragg. What is cost allocation?. AccountingTools® . July 1, 2013 http://www.accountingtools.com/questions-and-answers/what-is-cost-allocation.html