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kanthal - accounting

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Introduction

Table of Contents COMPANY OVERVIEW 2 PREVIOUS SYSTEM 3 KANTHAL 90 ACCOUNT MANAGEMENT SYSTEM 4 LIMITATIONS OF KANTHAL 90 ACCOUNT MANAGEMENT SYSTEM 6 IMPACT OF NON-STOCKED AND SMALL ORDERS 7 HOW TO HANDLE UNPROFITABLE CUSTOMERS 8 APPENDIX 'A' - DILUTED PROFITS 10 APPENDIX 'B' - IMPACT OF NON-STOCKED ORDERS 11 APPENDIX 'C' - IMPACT OF SMALL ORDERS 12 Company Overview Kanthal, the largest of six divisions of Kanthal-Hoganas, specializes in the production and sales of electric resistance heating elements. Kanthal has over 10,000 customers and produces over 15,000 items. The company consists of three divisions. Kanthal Heating Technology, world leader, with 25% market share in supplying heating alloys. Kanthal Furnace Products, a dominant player, with 40% market share in supplying a wide range of heating elements for electric industrial furnaces. And, Kanthal Bimetals, one of the few companies in the world with fully integrated manufacturing capabilities of thermo-bimetals for temperature control devices. Despite the company's steady sales and performance, the President, Mr. Ridderstrale, felt that a new accounting system was needed to help Kanthal extract accurate information regarding its manufacturing cost structure and the cost of supplying individual customers. ...read more.

Middle

4. Sales volume costs - includes all other S&A costs and is allocated proportionately to manufacturing volume costs. The new system followed the following four step procedure to more accurately calculate the operating profit for an order: Step-1: Calculate selling and administrative order costs. This was achieved by dividing the total S&A costs by total number of orders executed, including both stocked and non-stocked orders. Step-2: Calculate manufacturing order costs for non-stocked products. This was achieved by dividing the total manufacturing costs (for non-stock products) by the number of non-stocked orders. This step eliminated the disproportionate allocation of manufacturing costs to stocked products. Step-3: Calculate allocation factor for S&A volume costs. This was achieved by first computing the 'total volume costs' by subtracting the S&A and manufacturing order costs from 'total manufacturing and S&A costs'. Then S&A volume related costs were divided by manufacturing volume COGS to drive at the 'S&A allocation factor'. Step-4: Calculate operating profits on individual orders for non-stocked products. This was achieved by subtracting the volume related costs (both manufacturing and S&A) from the sales revenues followed by subtracting manufacturing and S&A order costs to obtain the operating profit per order. ...read more.

Conclusion

How to Handle Unprofitable Customers Currently Kanthal is faced with two unprofitable customers with large sales volume. There is an opportunity for Kanthal to turn these unprofitable customers into profitable customers. Further investigation reveals that one of these customers is using Kanthal as a backup supplier for last minute orders. Analysis indicates that orders of this type lead to unnecessary non-stock costs for Kanthal. In this case, Kanthal should consider implementing a surcharge for orders that require an immediate turnaround. This surcharge should be set so that it is sufficient to compensate for the additional costs incurred by rush orders. Furthermore, Kanthal should consider offering this customer some incentive so that they become a primary supplier. This will not only eliminate last minute orders, it will also reduce the number of non-stock orders. Kanthal should also offer their customers discounts for placing large orders. Given the significant charge associated with each order, it becomes very important to ensure that customers are placing fewer orders of larger values. Finally, if all efforts fail, Kanthal should focus its efforts on increasing sales volume for profitable customers and stop doing business with the unprofitable ones. Appendix 'A' - Diluted Profits Appendix 'B' - Impact of Non-Stocked Orders Appendix 'C' - Impact of Small Orders ?? ?? ?? ?? 1 ...read more.

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