As mentioned earlier, our current costing system treats most production costs and selling costs as fixed while treating some administrative costs as period expensies. With 80% of sales being attributed to our in-stock product line, the current costing system makes sense intuitively. However, our invoiced sales have increased and our current system indicates growth in profit, our return on capital is stagnant and our employees have decreased. Certainly, our costing system is not accounting for our true costs. With our in-stock items comprising only 20% of our product line, the sales of non-stocked items must be a major driver in the total cost to sell items. It is proposed that the non-stock item costs be isolated and evaluated differently than the costs for in-stock items so that the true cost of completing a transaction can be accurately captured.
First, it is proposed that a distinction be made between the costs associate with the sales of in-stock items and non-stock items. For in-stock items, the cost driver is based on volume due to the lower cost (relative to non-stock items) of selling those items. In-stock items will be regarded as ‘volume’ items. Non-stock items intuitively carry a higher cost to Kanthal and will be regarded as ‘order’ items. With those designations, reorganization of costs are proposed as follows:
Type of Personnel Order-Related Work Volume-Related Work
Stock Replenishment None All activities