1. Major Issues and General Scenario
General Scenario:
Kanthal is a successful and profitable company that is a worldwide market leader in many of the products that it produces. Nevertheless, its new president feels that the company needs a new strategy that will provide it with a way to further increase profits but without increasing costs.
The new president believes that the key to the new strategy is to be able to understand the true nature (i.e. costs) of customers and orders. He feels that if the company is able to tie costs o customers in an accurate manner, it will enable the company to better focus on higher profitability.
Major Issues:
Understand the cost structure of the company.
Allocate costs on a per customer and per order basis.
Implement a new cost system that will support the new cost allocation methodology.
Improve decision making on customers and sales orders based on the information provided by the new system.
2. Case Questions
2.1. What was the president trying to accomplish?
Basically, the president was trying to accomplish a move from a traditional cost accounting system to a new, ABC accounting system. This, in order to identify what are the true costs of each customer and each order, enabling the company to fully understand its cost structure thereby providing the base for better business choices (and higher profitability).
These are very sensible goals indeed. Even though the company is profitable, implementing a new, activity-based cost accounting system will allow the company to improve its margins and become even more focused and competitive in the future.
2.2. Why was the old system inadequate?
The old system was inadequate because of the following:
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... production costs to improve efficiencies
If all else fails, either increase prices to the point where the contribution margin is positive, or drop the customer.
3. Managerial Implications and Analysis Limitations
Managerial Implications:
Moving from a traditional cost accounting system to ABC can reveal hidden costs and hidden profits on the basis of the identified activities (i.e. customers, orders, etc.).
Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs which are in fact variable.
Analysis Limitations:
Inventory issues are not being addressed. What items should be held in stock, at what levels, for how long in advance, etc.
Production efficiency levels are not being addressed. Overall efficiency and cost effectiveness at the production level, bottle-necks, material consumptions, etc.
This plan alleviates many of the firm’s current uncertainties. With the price reduction and more public relations, there may be an improvement in the public perception of the company. The implemented plan supports continual profits and reduces the possible increase in regulatory constraints.
Rocket-Blast, LLC, a beverage maker, has seen its profit margins reduced which presents a real problem for the company going forward (Precord & Macdonald, nd). Management has decided that operating costs must be reduced in order to increase profit margins to
In the John Deere case, they were calling a lot of things overhead that weren't truly overhead (e.g. scrap, which is probably proportional to the amount produced). We discussed with my group how the internal transfer pricing arrangement probably encouraged the managers to think this way, since it awarded contracts on the basis of direct costs but, by the books, the actual transfer price was supposed to be the full price. In summary, the John Deere case was an exercise in thinking about how not to make pricing decisions.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Lastly, the stores and warehouses are not communicating well which is resulting in confusion for both parties. Store managers waste time by having to spend store hours on the phone with the DC to expedite demanded stock. This time waste can be avoided by properly organizing the warehouse and having informed workers who can get the job done right and on time. Also worth mentioning is the current condition of the warehouse; there is inventory underneath conveyors and scattered across aisles, making it harder to track down stock.
...h the full expenses included. Challenge overseeing and incorporating over a huge supply change and developing patterns.
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
The strategy book by Max McKeown is an excellent book for managers or leaders in general to read and follow in order to create a unique strategy for their business. The strategy book includes examples of strategies that were previously constructed and followed by small, medium and large companies. The book gives readers the chance to know the strategies that were employed by different types and sizes of business and how successful they were. These real life cases are what make the book so interesting and informative. The book is divided into different parts that inform the readers about formulating and then following the appropriate strategy.
One problem anyone is going to have in just about any industry is the amount of inventory to keep at warehouses. If there is too much inventory, then high costs will become a problem and hurt your bottom line. At the other end, if you try to save too much money by keeping inventories dangerously low, it may create stock-outs. These can infuriate your clients
..., the company is either generating insufficient margin to cover the high-service level or it is unable to deliver them at an acceptable cost.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
I believe that Decision Support Systems (DSS) can be properly implemented to facilitate decision making process as is done at Amazon.com. At Amazon.com DSS are used to emphasize change, speedy response, and flexibility in decision making. Though I believe that DSS are important in decision making especially for a company like Amazon.com whose focus is in e-commerce, there are concerns that must be addressed to make the implementation of DSS more accepted and effective.
Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community.