Gibson Case

Gibson Case Study

Gibson Insurance Company plans to implement a new management planning and performance system. To better assign costs to the correct product lines and business units, the company is reviewing its cost allocation process. Gibson hopes that refining their allocation process will give better insights into the firm’s profitability, product pricing decisions and sales agent compensation.

Gibson Insurance Company sells two financial products, annuities and life insurances. Both the annuities and life insurances are categorized as either new or in-force. Furthermore, to increase Gibson’s client base quickly, the company acquired both Compton Insurance Services and Midwest Mutual Insurance Company. Both of the acquired companies were maintained as separate legal entities, and treated them as wholly owned subsidiaries for legal and financial reporting purposes.

The controller of Gibson Insurance Company, Rebecca Hampton sought out to change how the company allocated corporate costs to the different product lines. The method installed currently was to allocate support costs based on the number of policies. Ms. Hampton developed new allocation basis for the different categories of corporate support costs. The corporate support costs and their respective new allocation basis are illustrated below:

1. Policy acquisition costs – Number of steps

2. Customer Service Costs – Number of incoming customer calls

3. Sales and marketing costs – Number of sales Solicitations

4. Other corporate overhead costs – Dollar value of AUM

Exhibit 1 illustrates the unit support costs for all four categories of financial products, and the total corporate support costs associated with each legal entity.

Rebecca Hampton, should continue to track information by product even if it is not required by regulators, because more precise information allows for management to better assess the health, and composition of the company. For example, implementing...