A Detailed Analysis of Kanthal's Management Accounting System

This report analyzes Kanthal's management accounting system, focusing on the defects of its previous cost system, which often misallocated costs and inaccurately assessed customer profitability. The report highlights the characteristics of both low-profit and high-profit customers, detailing their order patterns and service demands. It then examines the features of the Kanthal 90 account management cost system, including the classification of costs into order-related and volume-related categories. The analysis further discusses the challenges of large-volume customers and the potential for unprofitability due to pricing pressures and seasonal demands. The report emphasizes the importance of a robust cost system for making informed strategic decisions and ensuring accurate profit calculations.

MANAGEMENT ACCOUNTING

Management accounting
Answer – 1
The previous cost system used by Kanthal system suffered from various defects. The cost
system assumes most of the sales, marketing, and another administrative cost in terms of
percentage of the sales revenue. Hence, it impacts the profitable nature of the customers. If
the selling price of the customer goes ahead of the standard cost of manufacturing along with
the percentage of the markup, and administrative cost appeared to be profitable. On the
contrary when the selling price of the customer ranks below the standard manufacturing cost
than the mark up in terms of percentage stands unprofitable. The defect in the system led to
severe issues such as the segregating the customers in terms of their demand. This led to the
emergence of the low-profit customers and high profit customers. Low profit customers lay
higher emphasis on technical, as well as commercial service. In this scenario, they purchased
products of low margins in small orders and always ordered non-standard products that need
to be produced for them (Horngren, 2011). This created a problem for the company as
special discounts needed to be provided to the customer. Hence, the cost system leads to the
emergence of a system where the company suffered because special discounts needs to be
provided to the customers so as to reap the benefits.
Secondly, it became difficult with the current system to know the exact amount of profit that
was earned every time an order was placed with the company. The system failed to ascertain
the cost that individual customer order placed on various factors such as production, sales,
and resources of the company. In short, it became difficult to know about the hidden profit
and especially to the ones where the demand of the company ranks low (Maher, 2005).
Thirdly, the present cost system fails to project the distinction between two products and the
manner in which they perform. A customer can be profitable equally on a gross margin
scenario however, there can be profits that are not revealed and other hidden costs linked with
that of the customers. Hence, the present system failed to project the manufacturing cost
structure and the cost of supply. It is of utmost necessity to project the profitability of the
company, however, going by the normal scenario it can be commented that better information
is needed by the company and that can be effectively found if the cost system is strong in
nature. Further, the system fails to provide adequate knowledge on the profitability of every
order, product or a customer and hence, executing a strategy is difficult to operate (Needles &
Powers, 2013). To ensure a better situation and gain a better share in the market, it is needed
that the strategy must be strong and can happen when the cost system is properly established.
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In short, the cost was either indirect and the main defect of the system lies in the fact that the
system failed to know the ways to allocate them (Vaitilingam, 2010).
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Management accounting
Answer – 2
The low-profit customers are the ones that place high demand and this demand pertains to the
technical and commercial services. Low-profit customers are not often and are not frequent
in nature. The following are the major attributes of the low-profit customers:
 They have a major need of the technical and commercial services and hence, place
demand on such.
 The orders placed by them are small and caters to the low margin products. It implies
that their major reliance and emphasis remains on the products that do not have
enough margins. As the name indicates the low-profit customers cater to the products
that do not have high margin.
 The products ordered by them are not standard products and the production needs to
be done specifically for them. Since the products are of low margin and non-standard
products; it leads to a problem for the company in terms of manufacture.
 Availing business from such customer is a tedious task. In order to have a business or
to attract such customers, special discounts need to be provided to them. Such
customers are not frequent in nature, therefore, getting business need special attention
and offers. The introduction of special discounts is majorly needed when it comes to
low-profit customers (Marsh, 2009). Hence, going by the very discussion it can be
said that low-profit customers are difficult to be attracted and retained. The business
does not accrue regularly and for the order, there needs to be the presence of special
discount that will hurt the business.
 It is difficult to ascertain the business that will come from them because low-profit
customers are frequent to make orders. Moreover, the annual demand of the customer
cannot be known and therefore, needs intense analysis.
High-profit customers are the ones that have high margin capacity and order in huge quantity.
Unlike low-profit customers, the major emphasis of the high-profit customers is on the
products that do not have any resemblance to the technical or the commercial service. The
following are the attributes of high-profit customers:
 High-profit customers have higher capacity and hence deal in the high margin. It is of
immense benefit to the company because the order is of high margin.
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Management accounting
 There is no demand for technical or commercial service and hence that does not hurt
the company in terms of production. High-profit customers buy the standard product
in high margin and hence, it helps the company to grow in terms of revenue and
business.
 The annual forecast of the high-profit customers is easy to ascertain because the
customers themselves makes forecast their annual demand. In this scenario, it
becomes easy for the company to function and to ensure a production accordingly.
The company need not produce on a short basis or to specifically cater to their
demand (Robinson & last, 2009).
 High-profit customers bring high volume business to the company and hence are of
regular nature. This ensures that the business is on a regular basis and this helps to
know the profit out of such customers. When the forecast is known, it becomes easy
to ascertain the business and know the profit scenario. Such customers bring strong
business to the organization and help in increasing the revenue (Venanci, 2012). The
major reliance of any business is to have high-profit customers because there are
innumerable benefits attached out of them.
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Management accounting
Answer – 3
There were several features that were introduced by Kanthal 90 account management cost
system. In reality it differed from the traditional financial accounting. The new system
proposed to classify the organizational cost as order related or volume cost. Three major
drivers came to the forefront that is a range of product, technical support, and the new
product. However, they were eliminated because the categories comprised less than 5% of
the total cost.
The determination of the expenses was done in consideration to the sales volume and
production and the extent to which it is linked to production, as well as sales orders. The new
system introduced the fact that order costs can be high and that order cost can be tagged as
selling explicit cost. The major finding was of the view that the customers who were
considered as very profitable were actually break even or even lose customers. Therefore, the
major consideration that was coined in the concept is the elimination of the small customers.
There were major variations in tune to the various concepts and ideas (Lanen et. al, 2008).
Firstly, the manufacturing volume cost apart from the material, direct labor and variable
overhead included the product cost so that the inventory stock can be replenished. The best
move that was made under this strategy is that inventory comprised of 20% of the products of
Kanthal however; such products projected 80% of the sales so that the replenishment of the
product can be assumed as the production volume. Hence, manufacturing order cost
contained only the setup cost and other activities that came into existence when the customer
ordered a product which is not stocked normally. Further, under the new system, the
manufacturing costs were computed individually for every major product group. On the
other hand, the sales order projected the selling and administrative cost that can be linked
with the order of the customer (Deegan, 2012). The selling and administrative cost that
drives after subtraction of the sales order cost can be tagged as sales volume cost and the
allocation was done in a proportionate manner to the manufacturing volume costs.
Further, this system shed light on the spirit of effort in every department that exists between
volume and order related activities. The new system helps in the computation of profit with
ease and flexibility. As per the new method, it became easy to compute the profitability and
hence, computation became easy. Overall, the new system led to a various mechanism that
helped in the profit computation and helped in overcoming the frailties present in the old
system in regards to administrative, selling and overhead (Parrino et.al, 2012). In the
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previous system, the indirect costs were allocated to a product that relates to direct labor or
were selling and administrative cost that was considered as period expenses. The main benefit
that was garnered was that the traditional accounting categories were left and the new system
came to the forefront.
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Management accounting
Answer- 4
A large volume customer is the one who has high margin capacity and order in huge quantity.
The major emphasis of such customers is on the standard products. Therefore, the yearly
demand is easy to be computed. However, a large volume customer can be unprofitable in
nature because the manner of movement can be hampered by any of the events. A severe
competition exists in the market and therefore it is important for one company to get hold of
the customer who purchases in bulk. In tune to this, there must be a strong consideration in
the pricing factor. When it comes to large volume customer, it can be commented that such
customer can be highly unprofitable because at any point of time, such customers can get
linked to another company provides better flexibility in terms of price (Horngren & Foster,
2008). Hence, the one with which it is already associated might face a daunting task and
might prove to be unprofitable in nature. The seasonal demand is anticipated and going by it
the company performs that might take a hit when the high volume customer detaches from a
current organization. Hence, in all probability, it is essential that an entire dependency should
not be exerted on such customers because it can lead to unprofitable conduct. Trend and
competition have enhanced the competition to a greater extent and going by the very basis of
it, pricing plays a determining role (Needles, 2011). If the competitor pricing is strong it leads
to an unprofitable act for the current company. Hence, the company needs to be well aware of
the present condition that is prevailing.
The order pattern of a large volume customer should be huge and go by the very name; the
large volume customer must have a greater number of orders and high margin capacity. The
forecast is already known by the order pattern and hence, such orders are of recurring nature.
Typically, no alternative is chalked for such customers and have the yearly demand,
therefore, the companies need to have many such customers because if in case any it gets
detached then it might not lead to an unprofitable act (Lary & Christopher, 2012). The order
pattern of the large volume customer differs from the low volume customer in the sense that
the order is regular and of bulk while the low volume customer does not bring high-value
business and it is immaterial whether low volume customers are attached to the organization
or not (Drury, 2013). Hence, if the high volume customers fail to provide order or need to be
provided special discount for retention than it is unprofitable for the company. In other
words, the high volume customers need to be provided special emphasis in terms of pricing
and service so as to retain them. An absence of the above fact will lead to a severe problem.
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Management accounting
Answer – 5
The customer using the system of Kanthal had immense flexibility when it came to the
handling of special orders when the main supplier was unable to provide the service. It needs
to be noted that Kanthal people have always provided great services in terms of orders. It
was witnessed from Exhibit 8 and Exhibit 9 that 40% of the Kanthal customers were
profitable in nature and lead to a whopping 250% of realized profits. The most profitable
constituted 5% of the customers and generated 150% of the net profits. The least ones that are
10% of the customers lost 120% of the profits. Going to the exhibits, it can be said that a
strategy needs to be crafted by Kanthal and Riderstrale for the huge numbers of customers
who are unprofitable in nature and that applies to the high volume ones. It is the need of the
hour that the corporate management of the organization must conduct meetings with the
general, as well as sales manager of the operating division to undertake measures how to
handle the customers. Since the occurrence of the phenomena is entirely concerning the
customers, therefore, it is of utmost necessity that the customers handling program should be
effectively drafted so that the problem of managing them can be mitigated (Vanderbeck,
2013).
Moreover, both Kanthal and Riderstrale must develop account management system for the
operating division. Though there is a strong resistance to implement new account
management system and to implement it yet the exhibits demands the implementation of such
system into practice. Further, it has been noticed by Riderstrale that to satisfy them has been
of a major problem because it is expensive in nature. Therefore, it is the need of the hour that
the management must undertake measures to reduce the problem in terms of having big
customers. Further, it should always be noted that traditional cost accounting system is
unable to provide a clear cut reflection and hence, reporting cost and profit is not possible.
The trend has been clearly depicted through the exhibit 8 and exhibit 9 where the cumulative
profits and ranking has been shown. In order to enhance the position, it is essential that the
management must undertake mechanism concerning the customers so that a better
performance can be observed. The measures that can be taken by Kanthal and Riderstrale
should comprise of a change in the policy of the accounting system that will help to keep a
better composure of the high profit and the low-profit customer. Since the order varies
immensely, the presence of new accounting system will lead to better practice and hence, will
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be able to address the problem that was observed in the current scenario. Many of the
concepts of the cost need to be addressed so that the approach can help to provide better
services to the customers.
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