Topics: Profit, Costs, Cost Pages: 5 (1449 words) Published: February 7, 2009
Kanthal Case Study Solutions

INTRODUCTION:Kanthal is company that specializes in the production a nd sales of electrical resistance heating elements. Kanthal has about 10,000 customers and they pro duce about 15,000 items. The company consists of three divisions and these three divisions are as f ollows:1)Kanthal Heating Technology - 25% global market share2)Kanthal Furnace Products - 40% global market share3)Kanthal Bimetals - Manufacturer of one of the few fully integrated temperat ure control devicesMr. Ridderstrale, who became the President of the company in 1985, developed an dimplemented a plan that has involved completely changing and over-hauling their pre-existing tradi tional cost system. The new plan has been installed with the hopes that it will provide more accura te information about their manufacturing cost structure, as well as the costs of supplying individua l customers and orders. With this new information, Kanthal plans to redirect its resources to custo mers with hidden profits and reduce efforts that are focused on customers with hidden losses. The u ltimate purpose for this system change is to achieve higher growth and profitability.


Question 1:Why have selling administrative costs not traditionally been traced t o individual products and customers?

Answer 1:Under the old costs system, Kanthal management felt that selling and administration costs were fixed costs, and as a result they could not be changed, m anipulated, or utilized to influence growth or profitability. Traditionally, Kanthal had considered S"E expenditures to be period costs and were expensed in that manner rather than allocating them to the various product lines and customers. Under the old system, management failed to realize that s ome of their customers placed heavy demands on the organization while others did not. Therefore, no attempts were made to allocate S"A costs to the customers or product lines. As a result, costs wer e spread evenly and the focus of the sales force was on volume rather than the percent profit margin or the true bottom line contribution of each order to the company.

Question 2: Evaluate the approach taken at Kanthal to compute the profit of individual orderliness, including assigning S"A costs to each customer order. How were the costs of customer orders and the costs of producing non-stocked items estimated?

Answer 2: The company re-invented a way to approach their cost allocations. Instead of treating S"A expenditures as period costs, the company derived a methodology for allocating these costs where they were applicable. The financial managers solicited information from the various departments in the organization about the nature of the activities in each department. A new cost allocation method was constructed based on the information received.The new costs system allowed for management to capture the costs either as work that was either order related or volume related.

These were the primary cost drivers for the S"A and manufacturing expenditures. After discussing everything with the different department heads, the company would then determine how much of each departments' expenditures related to sales volume and production and how much related to handling individual production and sales orders. Four categories for cost allocation were later established:

1) Manufacturing volume related costs
2) Manufacturing order related costs
3) S"A volume related costs
4) S"A order related costs

Although this system was much more rigorous, it made a good faith effort to assign the various production and S"A expenditures to customers and products lines. The departments captured in this system were comprehensive and were also generally identified as to who would have responsibilities for manufacturing costs. Computing order and volume costs was a four-step process. First, S"A order costs were computed by dividing the total number of orders into total...
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