Kanthal
ABC led to an increased understanding of the varying extent to which the manufacturing of different products used a firm’s resources. Once it became accepted that not every product requires the same type and same level of activities, it was a small step to see that customers, too, differ in their consumption of resources. The size and number of orders, the number of sales visits, the use of help desks, and various other services can be very different
Ridderstale wanted a new costing system that could determine how much profit was earned every time an order was placed. He also wanted to find the hidden profits and hidden costs in each order.
Further, he believed that Kanthal had low profit and high profit customers depending on the demands that the customer placed on the administrative and sales staff. Under the old cost system:
Ridderstale was also concerned that selling and administrative expenses formed the largest cost category in the company and were growing. They accounted for 34% of total expenses and were treated as period costs rather than allocated to either products or customers.
Cost of Product = Standard full cost of manufacturing + 34% (Sales revenue).
According to this system, customers whose selling price exceeded the standard full cost of manufacturing and the allocated SM&A, then the customer appeared profitable. On the other hand, the customer whose selling price was below standard manufacturing cost and the allocated SM&A was considered unprofitable. So this approach basically assumes that a product with higher sales revenue (volume-based driver) required more selling and admin resources and vice-versa. No attempt was made to allocate these cost directly to individual customers or products. This old system assumed that each customer demands the same fixed level of Kanthal’s resources. However, each customer differs in their consumption of resources. The size and number of orders, type of order such as standard or non-standard products,
Ridderstale wanted a new costing system that could determine how much profit was earned every time an order was placed. He also wanted to find the hidden profits and hidden costs in each order.
Further, he believed that Kanthal had low profit and high profit customers depending on the demands that the customer placed on the administrative and sales staff. Under the old cost system:
Ridderstale was also concerned that selling and administrative expenses formed the largest cost category in the company and were growing. They accounted for 34% of total expenses and were treated as period costs rather than allocated to either products or customers.
Cost of Product = Standard full cost of manufacturing + 34% (Sales revenue).
According to this system, customers whose selling price exceeded the standard full cost of manufacturing and the allocated SM&A, then the customer appeared profitable. On the other hand, the customer whose selling price was below standard manufacturing cost and the allocated SM&A was considered unprofitable. So this approach basically assumes that a product with higher sales revenue (volume-based driver) required more selling and admin resources and vice-versa. No attempt was made to allocate these cost directly to individual customers or products. This old system assumed that each customer demands the same fixed level of Kanthal’s resources. However, each customer differs in their consumption of resources. The size and number of orders, type of order such as standard or non-standard products,