...Case Study #1 - Kanthal A 1. Introduction Swedish company Kanthal is one of the largest company of the Kanthal-Hoganas group. It is mainly producing electrical resistance heating elements. The product range is 15000 items and offering service and products to 10000 customers globally. 95% of sales are contributed by export sales, and its annual return on employed capital is above 20%. The products are mainly produced by three branches, the market proportion is various between the three divisions. * Kanthal Heating Technology -25% of market shares; * Kanthal Furnace Products -40% of market shares; * Kanthal Bimetals –one of the few companies that producing fully integrated thermo-bimetals at that time. 2. Issues 1. Kanthal allocated the huge amount of SMDA expense equally to each customer. Since the profit generated from each customer is different and each customer is demanding on SMDA resources. The need to attempt linking between SMDA expense with orders or other cost drivers are becoming increasingly critical. 2. How to measure the profitability customers form all customers, the need to work out accurate cost to each customers, based on the each activities and demand of SMDA recourses. 3. How to managing those unprofitable but with top total sales volume customers. 3. Analysis Old account management system The pervious accounting system cannot distinguish orders between for stocked and non-stocked items, therefore the difference...
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...With a small numbers of competitors in the industry, Kanthal is considered to be a world leading company who manufactures a various range of heating products; yielding approximately 20% return of capital and SEK 850 million sales revenues. Kanthal can be classified as a manufacturing-sector company. Currently, the company is a successful organisation who enjoys the decent economic condition and has expanded its business over the continents. Kanthal's main income generated from sales outside Sweden; 95% of sales revenue gained from export. However, to prevent the company from economic and financial uncertainty in the future, the president of Kanthal, was always eager to better the profitability and improve its account management system. In the past, the main business strategy of Kanthal was to solely increase sales volume. The traditional cost of accounting system distributed resources equally, across every product, and customer base was treated homogeneously. As a result, there were substantial errors on cross-subsidisation and cost allocations, by which they created “hidden profit” and “hidden loss. An important fact that had to be taken into account was that the higher sale volume, the higher commissions and bonuses Kanthal had to pay to its employees. In other words, the more sales revenue the company generated, the higher administrative costs the company incurred. However these overheads costs, which accounted for 34% of cost structure, were treated as period cost. Hence...
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...Jasmine Reese Project 1 AC 361.001 Kanthal 1. Ridderstrale wanted an account management system in order to achieve more growth and profitability within his company. Ridderstrale wanted to leave the traditional financial accounting categories in the past, because he found that most of the organizational costs could be classified as either order-related or volume costs. He wanted to achieve this without adding sales and administrative resources. He also measured and evaluated the costs of individual customer orders on the production, sales, and administrative resources of the company. Ridderstrale felt that the new system was necessary to determine how much profit was earned each time a customer placed an order. Ridderstrale’s goal was to get more accurate information about the company’s manufacturing cost. Ridderstral’s goals were sensible. The new system allowed cost to be properly allocated across different accounting pools. It allowed Kanthal to identify which high volume customers are actually more expensive to the company and which low volume customers are actually much more profitable. In the end, Ridderstrale will be able to more accurately identify costs and profits and categorize them accordingly. 2. The previous cost structure: a. Could show two customers being equally profitable on all gross margins when there could be hidden costs and or hidden profits present. b. Resources are equally distributed across all products and customers. They do not measure an individual...
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...Kanthal specializes in production and sales of electrical resistance heating elements and is headquartered in Hallstahammar in Sweden. In 1985, Kanthal had about 10,000 customers and 15,000 items produced with sales revenue of SEK 850 million between 1985-87. Kanthal consists of three divisions: - Kanthal Heating Technology - Kanthal Furnace Products - Kanthal Bimetals It has manufacturing facilities in Sweden, Brazil, UK, USA, Germany and Italy. In 1985, Kanthal had a change in leadership with a new President, Carl-Erik Ridderstrale. Upon becoming President, Ridderstrale initiated a new strategic plan (Kanthal 90) to ensure the resources were adequately allocated to increase profits while maintaining a return on capital in excess of 20%. With the new Kanthal 90 plan, Ridderstrale wanted to achieve additional growth and profitability, without adding sales and administrative resources to handle increased volume. Ridderstrale hoped to achieve this by transforming the existing cost system to gain better information on their manufacturing cost structure, as well as SG&A costs tied to servicing individual customers and orders. This will enable them to direct their resources better to customers with hidden profits and reduce efforts to service customers with hidden losses. Under the existing cost system, most sales, marketing and administrative costs were treated as a period expenses and remained unanalyzed. These were not allocated to products and services unlike indirect costs...
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...Kanthal 1) President’s accomplishments 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) Drawbacks with the previous system The old system was inadequate because of the following: The system was designed for a more labor-intensive production process (i.e. 1 book-keeper for every 10 blacksmiths vs. 8 book-keepers for every 3 blacksmiths) The system allocates overhead costs on an equal basis between customers and products, which creates discrepancies and hidden profits/costs. Hidden profit and hidden cost customers are created when they are over or under-burdened by the unfair distribution of overhead costs. In extreme cases, these can make unprofitable orders look profitable, and vice versa. For example, let us take a look at a sales account manager who spends 99% of his time one month negotiating an order from a new customer A that will earn a $3,000 profit. During the same month, he spends 1% of his...
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...visit our student-to-student file sharing network. Kanthal Case Study Solutions INTRODUCTION: Kanthal is company that specializes in the production and sales of electrical resistance heating elements. Kanthal has about 10,000 customers and they produce about 15,000 items. The company consists of three divisions and these three divisions are as follows: 1)Kanthal Heating Technology - 25% global market share 2)Kanthal Furnace Products - 40% global market share 3)Kanthal Bimetals - Manufacturer of one of the few fully integrated temperature control devices Mr. Ridderstrale, who became the President of the company in 1985, developed and implemented a plan that has involved completely changing and over-hauling their pre-existing traditional cost system. The new plan has been installed with the hopes that it will provide more accurate information about their manufacturing cost structure, as well as the costs of supplying individual customers and orders. With this new information, Kanthal plans to redirect its resources to customers with hidden profits and reduce efforts that are focused on customers with hidden losses. The ultimate purpose for this system change is to achieve higher growth and profitability. PROBLEMS, ANSWERS " SOLUTIONS: Question 1: Why have selling administrative costs not traditionally been traced to individual products and customers? Answer 1: Under the old costs system, Kanthal management felt that selling and administration costs...
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...http://ocw.mit.edu ____________ MIT OpenCourseWare 15.963 Management Accounting and Control Spring 2007 For information about citing these materials or our Terms of Use, visit: ________________ http://ocw.mit.edu/terms. 15.963 Managerial Accounting and Control Spring 2007 Prof. Mozaffar Khan MIT Sloan School of Management Wilkerson Why is Wilkerson examining its costs now (what is the catalyst)? Its competitive environment: Declining overall profitability, price pressures on one product line, but apparent price inelasticity of demand for other product lines. How many overhead cost pools does Wilkerson currently have? One. Allocation base is direct labor dollars. Rate is 300%. Why do pumps have low profitability? They use more labor and machine hours, so this seems appropriate? 15.521 [Spring 2006] Managerial Accounting & Control 2 Wilkerson Under what circumstances is refining the costing system likely to be beneficial? Multiple products, including commodity and specialized products, with large differences in volume and resource consumption. Price pressures and declining margins. Mature product market with limited opportunities for innovation. Low entry barriers in product market. High overhead costs. Wilkerson meets most of these criteria. 15.521 [Spring 2006] Managerial Accounting & Control 3 Wilkerson Activity-based costing (ABC) is one tool for refining...
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...Profitability Analysis Using Activity-Based Costing by Priscilla Wisner Executive Summary • • Traditional cost allocation methodologies in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Activity-based costing (ABC) provides more meaningful information about the drivers of costs, the activities performed in a firm, and the relationship between costs and products, customers, markets, and segments. In addition to supplying more detailed and better cost and profitability information, an ABC analysis enables managers to evaluate processes from an activity viewpoint, leading to identification of non value-adding activities and process inefficiencies. ABC does not change overall profitability in a firm; it better aligns cost assignment to the causes of those costs. With better information, better decisions can be made in a firm to improve profitability—this is the power of ABC. • • • Introduction Cost allocation in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Traditional cost allocation practices allocate all manufacturing overhead costs using a single driver such as direct labor hours, direct labor dollars, or machine hours. Sales-related costs are typically ignored. While technically accurate, in most complex organizations a single overhead cost driver is not sufficient to accurately assign the pool of overhead costs to the products...
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...MANAGEMENT S T R AT E G Y MEASUREMENT M A N AG E M E N T AC C O U N T I N G G U I D E L I N E Customer Profitability Analysis By Marc J. Epstein Published by The Society of Management Accountants of Canada, the American Institute of Certified Public Accountants and The Chartered Institute of Management Accountants. N OT I C E TO R E A D E R S The material contained in the Management Accounting Guideline Customer Profitability Analysis is designed to provide illustrative information with respect to the subject matter covered. It does not establish standards or preferred practices.This material has not been considered or acted upon by any senior or technical committees or the board of directors of either the AICPA, CIMA or The Society of Management Accountants of Canada and does not represent an official opinion or position of either the AICPA, CIMA or The Society of Management Accountants of Canada. Copyright © 2000 by The Society of Management Accountants of Canada (CMA Canada), the American Institute of Certified Public Accountants, Inc. (AICPA) and The Chartered Institute of Management Accountants (CIMA). All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, without the prior written consent of the publisher or a licence from The Canadian Copyright Licensing Agency (Access Copyright). For an Access Copyright Licence, visit www.accesscopyright.ca or call toll free...
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...DSM enhances its presence and makes more profits than individual in the India’s growing composites market (Reinforced Plastics, 2010). In addition, there is a synergy advantage that DSM produces what Kemrock need and makes production more sustainability. They make green production by reducing energy and water consumption to minimize the environmental impact of operations (DSM, 2012). Therefore, DSM has a successful business in India composites marketing by joint venture. However, there are some challenges before company enter foreign market with joint venture. Firstly, viability of joint venture may affected by changing circumstances (Griffin and Pustay, 2013). Kanthal is famous for creating materials of alloys and heating in Sweden and built a joint venture with a agent company in India. Due to legal restriction, Kanthal lost its’ 10% shares to the local partner (Hyder, 2000). Moreover, foreign retailers can only sell products to other retailers, forbid sell to individuals (Lapoule, 2010). In addition, for joint venture, competition and profitability are the key challenge to continue to succeed in India market. On the one hand, the ability to break even is a question before entering new markets. Because there are high real estate costs and rental rates in India. Also recover initial investments is a difficult thing for joint venture. Starbucks built a 50:50 joint venture with Tata group and entered India in 2012. However, Starbucks could not use its name to secure any discounted...
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...MBA (2011-13) – Semester IV – ACTIVITY BASED COSTING ASSIGNMENT - LEARNING EXERCISE Students will select a company or firm or business unit in any one of the following industries: 1) Manufacturing 2) Insurance 3) Bank 4) Health care 5) Hospitality 6) Government 7) Service Each student should explore the internet for an example of a company that had implemented Activity Based Costing (ABC) and Activity Based Management (ABM) with a focus on determining customer profitability. Prepare a report (suggested length – not more than 10 pages) covering the following and give a briefing in the class: 1) Describe, in brief, the company and its business. 2) What was the problem faced by the business or company? 3) What was the scope of ABC / ABM project? 4) What were the goals for the ABC / ABM project? 5) How ABC/ABM was implemented? 6) Summarize the results achieved after implementation of the project. Financial evaluation of results by quantification expected. 7) Your observations, comments, criticism and suggestions, if any. 8) Legend, bibliography, references etc. Submit assignment to Exam Section. Print-out of PPTs (handout mode – 4 or 6 slides per page) can be submitted later, but before presentation in the class. Important: This is an individual assignment and each student should select different company from the sector selected for study and complete the...
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...the refractories materials, is formed, inducing expensive maintenance periods. The aim of this work is to find the reaction that takes place between the Slag and the bricks, in order to find the parameters that have to be changed to improve the bricks lifetime in the kiln. The use of bricks with higher alumina content is one of the solutions, but it is expensive. The influence of Alkalis and especially Na2O has been studied before in inert atmosphere. In this work it will be studied in air as well as the influence of the alumina content of the brick. Experiments were performed in air atmosphere, using powder samples that have been compressed into pellets. The devices used to characterize the reaction and the product of the reaction were: Kanthal furnace, X-ray diffraction (XRD), dilatometer, differential scanning calorimetry and thermogravimetry (DSC/TG) in-situ mass spectrometer, Scanning electron microscope (SEM) and Energy dispersive spectrometry (EDS). The XRD experiments permitted to show the presence of a glassy phase after a heat treatment of the samples containing alkalis at 1350°C. Dilatometer experiments gave more information about the influence of alkalis; it catalyzed the sintering reaction. The DSC/TG/spectrometer permitted to...
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...Activity Based Costing (ABC) is best known for its appilcation in computing product costs, but firms also find it useful in determining the cost of serving customers and as a basis for evaluating the profitabilty of a specific customer or group of customers. Why is this important? Most managers agree that 80% of their profits come from the top 20% of their customers and most important, the bottom 20% of their customers are unprofitable. For example, to compete with Walmart,Best Buy works hard to attract profitable customers and equally hard to discourage the unprofitable customers which those that are price shopping and looking for discounts and promotions and comparing prices to Walmart. Best Buy studies demographic and sales data for each store location to identify profitable and unprofitable customers. Customer profitabilty analysis idetifies customer service activities and cost drivers and determines the profitability of each customer or customer group. Here, customer service include all activities to complete the sale and satisfy the customer including advertising, sales calls, delivery, billing, collection, service calls, inquiries and other forms of customer service. Customer profitability analysis allow managers to: * Identify most profitable customers * Manage each customer’s cost-to-serve * Introduce profitable new products and services * Discontinue unprofitable products, services or customers * Shift a costomer’s purchase mix toward higher-margin products...
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...Accounting Education 11 (4), 365–375 (2002) Derrick’s Ice-Cream Company: applying the BCG matrix in customer pro tability analysis M A LC O LM SM I T H * Division of Business and Enterprise, University of South Australia and Leicester Business School, De Montfort University, UK Received: August 2001 Revised: October 2001; June 2002 Accepted: July 2002 Abstract This case highlights the differences in the pro tability possible when different customers are in receipt of substantially the same product. It provides the opportunity to develop a customer portfolio, along the lines of the Boston Consulting Group (BCG) portfolio matrix, as part of a customer pro tability analysis. Keywords: customer pro tability, BCG matrix, delivery policy, portfolio pro le, purchasing pattern, inventory holding The case Derrick’s Ice-Cream Company is located in modern premises and manufactures and distributes 30 different ice-cream product lines from its suburban base in the UK. The products are distributed by Derrick’s own eet of refrigerated trucks to six major wholesale distributors. Annual sales are currently around the £10m level, distributed among the wholesalers as indicated in Table 1. Derrick’s control about 35% of its metropolitan market, but this shrinks to less than 10% in outlying areas where there are many small competitors. Derrick’s will usually hold up to four weeks of stock in their central cold stores to meet the distribution requirements of their six major customers...
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...Source: http://www.allbusiness.com/accounting-reporting/methods-standards-cost-accounting/498244-1.html#ixzz1nMWBS5qI By Juras, Paul E. ABSTRACT Descriptions of activity-based-costing (ABC) systems have become a standard part of managerial accounting texts. While ABC implementation issues are the focus of a number of articles, these issues are often not addressed in a typical textbook. This case is designed to familiarize you with the behavioral and technical variables that can aid or impede successful ABC implementation. Anderson's (1995) factor-stage model provides a template to organize the discussion of ABC success factors. In this case, you will be cast in the role of a business consultant. You are asked to synthesize the case study's key "change management" insights into a report that could be shared with co-workers in an intranet-based knowledge management system. In addition, you may be expected to prepare a formal presentation of the report for your peers. Implementing change in an organization is about ninety percent cultural and ten percent technical. This is because the organization dynamics, politics, and search for a champion that go on are the real issues that make or break the project. One of the reasons we were able to implement ABC successfully was because the right people became champions. Chris Richards, Director of MIS, Global Electronics, Inc. BACKGROUND Global Electronics, Inc. (GEI), headquartered in Sarasota, Florida, designs, manufactures...
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