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.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
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