Profit and Account Management

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1. What was the Kanthal president, Ridderstråle, attempting to accomplish with the Account Management System? Are these sensible goals?

Ridderstrale had the objective to find hidden profits and losses contained in their current accounting system. The old system did not fully disclose how their costs were applied to the sales accounts. The goals are very sensible as they will allow them to move forward with the proper information.

2. Why did Ridderstråle feel that the previous cost system was inadequate for the new strategy?

The new strategy/system was needed “to promote high-margin products to high-profit customers.” The old system didn’t work well because it applied S&A expenses as a percentage of sales revenue and therefore hide some of the actual costs.

* How were manufacturing costs treated in this system? How were sales, marketing, and administrative costs treated?

Manufacturing costs are applied using direct labor hours while S&A costs are applied as a percentage of sales revenue. This was a big problem when customers ordered something not in stock.

* Why could there be hidden profit and hidden loss customers with the previous cost system? What makes a customer a “hidden loss” customer?

The old system did not differential between orders for products in stock versus orders for products not in stock. It broadly applied the cost as a percentage of sales, which in turn hid losses caused by customers that ordered products out of stock.

3. How does the new Kanthal Account Management System work? Use the calculations in Exhibit 5 (see hints above) to illustrate and explain the four cost pools and drivers, and the calculation of the ABC rates. How are manufacturing overhead costs and sales, marketing, and administrative costs treated differently under this new system versus the previous cost system?

The new systems allocated costs based on order or volume. The four cost pools were S&A order costs, S&A...
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