The president wanted to move away from their traditional financial accounting categories, they wanted to classify organizational costs as Order related or Volume costs. He wanted to allocate resources so that we could increase profits while maintining a return on employed capital in excess of 20%. They were indeed sensible goals, the president wanted to increase profitability by individually listing and measuring the cost of each activity and focus on those that were most profitable for Khantal.
Why did Riddestrale feel that the previous cost system was inadequate for the new strategy? Why could there be hidden profit and hidden loss customers with the previous cost system? What causes a customer to be a “hidden loss” customer?
Because the previous cost system did not clearly allocate how much of the expenses of each support department related to the volume of sales and production nor how much was related to the handling of individual production and sales orders. There could be a hidden profit only 20% of Khantal’s products were stocked in inventory, but these products represented 80% of sales orders so the cost of continually replenishing these products was assumed to be correlated with the actual output of production. A customer that costs are implemented with improper accounting systems could be reflected as profitable, when it actually generates high costs that are not easily traced, and are allocated to other customer that may not deem these costs.
How does the new Khantal 90 account manager system work? What new features does it offer? What are its limitations that may limit its effectiveness?
It specified overall profit objectives by division, by product line, and by market, as well produce additional growth without adding sales and administrative resources. The system measured costs that individual customers orders placed on the... [continues]
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