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What was the Kanthal president, Ridderstrale, attempting to accomplish with the Account Management System?

Are these
sensible goals? Why or why not?

The motivation for Carl-Erik Ridderstrale, president of Kanthal, to develop an Account Management System was to find a
process of determining the profitability of individual customer orders. An accurate account measurement system was
needed in order to achieve a strategy for increasing growth and profitability without adding a significant amount of sales
and administrative resources to handle anticipated increased sales. In order to carry out this strategy, a system was needed
to allocate overhead expenses to the different categories of customers as well as products.
Ridderstrale's motivation for the new system is a sensible goal to achieve in order to determine if the company is actually
making money with their customers. With future growth imminent due to the success of their products, it was important
that effort was taken to ensure that variable selling, general, and administrative (SG & A) costs did not increase faster than
sales revenue.
As Kanthal expanded operations and increased their market share, they captured business by meeting their customers'
expectations for increased service. Increased demands were placed on their production and order-handling processes due to
the JIT approach adopted by two of Kanthal's top customers in terms of total sales volume. It was also determined that one
of these customers was actually using Kanthal as a supplier for small special orders of a low-profit item when their main
supplier could not deliver. (Bruns, 1998)
While this type of service created value for specific customers, it came at a high cost. In order to remain profitable, the
company had to find a way to raise profit margins for customers they identified as requiring special services or transition to
a low cost strategy.
Ridderstrale's strategy was to redirect their efforts to customers they identified with hidden profits and reduce resources to
those customers with hidden losses. This strategy could allow the company to attain or grow their current market share with
a higher profit level.
Why did Ridderstrale feel that the previous cost system was inadequate for the new strategy? Why could there be hidden
profit and hidden loss customers with the previous cost system? What causes a customer to be a "hidden loss" customer?
Under the existing cost system, sales, marketing, and administrative costs were allocated as a percentage of sales revenue.
If the selling price exceeded the standard full cost of manufacturing plus the set % mark-up for S G & A expenses, the order
appeared to be profitable. SG & A expenditures were considered fixed costs that could not be manipulated or changed to
influence profitability. These expenditures were treated as period costs and allocated as a percentage of sales revenue rather
than allocating them based on their actual costs to specific products or customers.
An issue with the previous system is that certain customers historically placed significant demands on the company's
administrative and sales staff. Hidden costs associated with customers placing special orders or those requiring frequent
small shipments were not apparent since data did not exist under the old system to show their demand or ordering patterns.
In addition, customers whose demands on the company were low were hidden profit customers that were not recognized
under the previous cost system. Exhibit 3 in the case portrays a representation of how the traditional costing method could
not accurately show hidden costs and profits for Kanthal's different customers since some customers required special value-
added services that were not billed. Thus, under the previous system, costs were allocated evenly to all types of customers
based on sales revenue without a true and accurate contribution margin known for each customer order. (Bruns, 1998)
In analyzing their customer profitability, they discovered that the 80-20 rule (80% of sales generated by 20% of customers)
needed revision. An analysis determined an actual 20-225 rule was operating (20% of customers were generating 225% of
profits.) Approximately 70% of their customers fell in the break-even area, and 10% of their customers were losing 125%
of profits. (Internet,
How does the new Kanthal 90 Account Management system work? What new features does it offer? What are the
limitations that may impact its effectiveness?

Ridderstale's Kanthal plan involved determining where and how employees could be repositioned into more profitable areas
to generate future growth. A strategic plan was formulated to determine how to best move employees from the corporate
staff office to functions in sales, R&D, and production. (Bruns, 1998)
Under the Kanthal 90 Account Management system, overall profit objectives were specified by division, product line, and
market. The design of this activity-based cost system focused on increasing profitable activities and eliminating or
decreasing the unprofitable ones. The new system was designed to measure the true costs of individual customer orders
place on the production, sales, and administrative resources of the company. SG & A expenditures would no longer be
treated as period costs. (Bruns, 1998)
A Swedish management advisory group (SAM) was hired to assist in developing a system for analyzing production, sales,
and administrative costs at the Hallstahammar plant. Information was solicited from various key employees assigned to a
project team to determine the true nature of activities and a description of the events which triggered demands for these
activities in each department. As a result of these extensive interviews, a new cost allocation method based on the concept
of activity-based costing was developed that identified costs as either order related or volume related, the primary cost
drivers for SG & A expenditures. (Bruns, 1998)
A determination was then made by the project team of how much of each support department's expenditures related to sales
volume and production and how much related to handling individual production and sales orders. Under the Kanthal 90
system, four new components were created to accurately determine true costs:
1. Manufacturing volume costs
2. Manufacturing order costs
3. Sales order costs
4. Sales volume costs
Exhibit 5 of the case illustrates a sample calculation of order and volume costs by product group. (Bruns, 1998)
Calculating the true order and volume costs became a detailed four step process. The process began with calculating S&A
order costs by dividing the total number of orders into total S&A costs identified in Exhibit IV of the case. Manufacturing
order costs for non-stocked items are then calculated by dividing the total cost for these items by the number of orders for
non-stocked products. The S&A allocation factor was then determined to calculate S&A volume related costs and applied to
manufacturing costs of goods sold (CGS). The final step involved calculating operating profit on individual orders for non-
stocked items. This step required subtracting volume related costs from sales revenues followed by subtracting
manufacturing and S&A order costs from the resulting gross margin to determine the operating profit for the order. (Bruns,
A limitation of the system that could impact its effectiveness would be the amount of time required to identify and collect
the data needed for this analysis in the proper form. A detailed and accurate identification of all costs relating to all stocked
and non-stocked orders is vital.
The new account management system was seen by some of the staff at the corporate headquarters as another intrusion into
their operations. In order for the system to be a success, Ridderstrale had to find a way to convince all employees to buy
into the new system. (Bruns, 1998)
What should Ridderstrale do about the two large unprofitable customers revealed by the account management system?

Use of the Kanthal 90 account management system provided insight to Ridderstrale on determining where their actions
would most likely have the greatest impact on profits. An attempt should be made to raise prices for products requiring
heavy demands on their support resources and lower prices established for those products having less demand on support
resources. If re-pricing can be agreed upon, a new sales mix can be established that makes fewer demands on resources or
generates more revenue with the same consumption of resources. (Kaplan & Narayanan, 2001)
Ridderstrale must approach their two largest customers in negotiating a change in the manner they are doing business. To
encourage a change in customer behavior, results from the new account management system should be shared with the
companies to suggest that the multiple change orders are a cost incurred by them as well. By reviewing the data with the
customer, they could resolve the issue by persuading them to agree to change their ordering behavior. If an agreement
cannot be made to revise their ordering behavior, selective price changes should be implemented depending on volume or
special order needs.
Additional guidelines should be established to incorporate an activity-based pricing feature that would include a surcharge
for any change made to existing orders. A minimum order size should be established as well with a set surcharge if not met.

Development of the Kanthal 90 Account Management System will allow the company to grow their market share as well as
achieve a higher profit level. Utilizing this system will allow for analysis of the information needed to make strategic
decisions. However, it is important that the system is monitored on a continuous basis to ensure that cost drivers have not
changed over time.

Works Cited:
Bruns, William J., Accounting for Managers: Text and Cases. (2nd Ed.)
Southwestern., 1998

Internet, ,

Kaplan, R. S., & Narayanan, V.G. Customer Profitability Measurement and

Management. Harvard Business Press., 2001

Kaplan, Robert S., The ABCs of Accounting for Value Creation.

Planning Review. Chicago. July/Aug 1990 Vol. 18 Iss 4

Marshall, David H. & McManus, Wayne W. Accounting: What the Numbers

Mean, (4th Ed.) Irwin/McGraw-Hill., 1999