Costs and Account Management

Topics: Costs, Profit, Fixed cost Pages: 5 (1649 words) Published: April 19, 2011
What was the Kanthal president, Ridderstrale, attempting to accomplish with the Account Management System? Are these sensible goals? Why or why not? The motivation for Carl-Erik Ridderstrale, president of Kanthal, to develop an Account Management System was to find a process of determining the profitability of individual customer orders. An accurate account measurement system was needed in order to achieve a strategy for increasing growth and profitability without adding a significant amount of sales and administrative resources to handle anticipated increased sales. In order to carry out this strategy, a system was needed to allocate overhead expenses to the different categories of customers as well as products. Ridderstrale's motivation for the new system is a sensible goal to achieve in order to determine if the company is actually making money with their customers. With future growth imminent due to the success of their products, it was important that effort was taken to ensure that variable selling, general, and administrative (SG & A) costs did not increase faster than sales revenue. As Kanthal expanded operations and increased their market share, they captured business by meeting their customers' expectations for increased service. Increased demands were placed on their production and order-handling processes due to the JIT approach adopted by two of Kanthal's top customers in terms of total sales volume. It was also determined that one of these customers was actually using Kanthal as a supplier for small special orders of a low-profit item when their main supplier could not deliver. (Bruns, 1998) While this type of service created value for specific customers, it came at a high cost. In order to remain profitable, the company had to find a way to raise profit margins for customers they identified as requiring special services or transition to a low cost strategy. Ridderstrale's strategy was to redirect their efforts to customers they identified with hidden profits and reduce resources to those customers with hidden losses. This strategy could allow the company to attain or grow their current market share with a higher profit level. Why did Ridderstrale 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? Under the existing cost system, sales, marketing, and administrative costs were allocated as a percentage of sales revenue. If the selling price exceeded the standard full cost of manufacturing plus the set % mark-up for S G & A expenses, the order appeared to be profitable. SG & A expenditures were considered fixed costs that could not be manipulated or changed to influence profitability. These expenditures were treated as period costs and allocated as a percentage of sales revenue rather than allocating them based on their actual costs to specific products or customers. An issue with the previous system is that certain customers historically placed significant demands on the company's administrative and sales staff. Hidden costs associated with customers placing special orders or those requiring frequent small shipments were not apparent since data did not exist under the old system to show their demand or ordering patterns. In addition, customers whose demands on the company were low were hidden profit customers that were not recognized under the previous cost system. Exhibit 3 in the case portrays a representation of how the traditional costing method could not accurately show hidden costs and profits for Kanthal's different customers since some customers required special valueadded services that were not billed. Thus, under the previous system, costs were allocated evenly to all types of customers based on sales revenue without a true and accurate contribution margin known for each customer order. (Bruns, 1998) In analyzing their customer...

Cited: Bruns, William J., Accounting for Managers: Text and Cases. (2nd Ed.) Southwestern., 1998 Internet, , Kaplan, R. S., & Narayanan, V.G. Customer Profitability Measurement and Management. Harvard Business Press., 2001 Kaplan, Robert S., The ABCs of Accounting for Value Creation. Planning Review. Chicago. July/Aug 1990 Vol. 18 Iss 4 Marshall, David H. & McManus, Wayne W. Accounting: What the Numbers
Mean, (4th Ed.) Irwin/McGraw-Hill., 1999
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