Profit and Account Management Essay
1. What was the Kanthal president, Ridderstrale, 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 Ridderstrale 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 reated 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 volume cost, manufacturing order cost, and manufacturing volume cost. In the old system costs were “indirect costs were either manufacturing costs that were allocated to products based on direct labor, or they were Selling & Administrative Costs, that were treated as period expenses and were unanalyzed”. * What new features does the Account Management System offer? What are its limitations?
The new system provided a better way to identify hidden costs and determine if customers are causing profits or losses. They will be able to show profits and losses by product, customer, and market. The limitation of this new system may be the cost of implementing this new methodology and training employees how to use it. 4. Consider a product line whose products generate a 50% margin (revenue minus volume-related manufacturing and volume-related S&A expenses but before subtracting the sales cost of handling an order and the manufacturing cost to handle an order for a non-stocked item).
The sales-order cost for handling an individual customer order is SEK 750, and the extra manufacturing-order cost to handle a production order for a non-stocked item is SEK 2,250. a. Compare the net operating profits of two orders, both for SEK 2,000. One order is for a stocked item and the other is for a non-stocked item. Stocked items: $2000*50%=$1000-$750 = $250 SEK Non-Stocked items: $2000*50%=$1000-$2250 = ($1250) SEK b. Compare the operating profits and profit margins of two customers, A and B. Both customers purchase SEK 160,000 worth of goods during the year.
A’s sales came from 3 orders, for 3 different non-stocked items. B’s sales came from 28 orders, of which 6 were for stocked items and 22 for non-stocked items. | Customer A | Customer B | purchases| $ 160,000. 00 | $ 160,000. 00 | profit margin| $ 80,000. 00 | $ 80,000. 00 | stocked orders| | $ 6. 00 | non-stocked orders| $ 3. 00 | $ 22. 00 | stocked expense| | $ 4,500. 00 | non-stocked expense| $ 6,750. 00 | $ 49,500. 00 | Profit/Loss| $ 73,250. 00 | $ 26,000. 00 | | | | Stocked Rate| $ 750. 0 | | Non-stocked Rate| $ 2,250. 00 | | 5. What can Kanthal management learn from information like that found in Exhibits 6 -9? * Profit/Loss per order and customer * Profit/Loss per customer * Margin per order * Margin per customer * Cost Allocations * How stocked/non-stocked items affect costs c. Explain the calculation of customer operating profit and profit margin in Exhibits 6 and 7. As a Kanthal manager, what would you do with the customer information in these exhibits? Knowing the operating profits I would use this information to evaluate the value of each customer.
I would use the information to provide better forecasting because we know the effect of higher orders on non-stocked items. d. As a Kanthal manager, what conclusions can you draw from Exhibits 8 and 9, and what actions would you take based on this information? Specifically, what would you do about the two large unprofitable customers revealed by the Account Management System? I would suggest that we try for better forecasting of items as to no incur the extra cost associated with non-stocked products. I would also put in place incentives to get the customers to purchase more in one order and reduce the cost per order.