Kanthal case study - 3. How does the new Kanthal 90 Account...

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3. How does the new Kanthal 90 Account Management System work? What new features does it offer? What are its limitations that may limit its effectiveness? In an attempt to achieve the company’s new strategy, Mr. Ridderstrale hired a Swedish management advisory group to help his team develop a system to analyze production and sales and administrative costs associated with each order. Over a period of several months of interviews and investigation, the team was able to divide Kanthal’s costs into order and volume costs. Further analysis revealed four major cost drivers associated with order placement and completion: 1. Manufacturing order costs – includes the cost of setup and other activities when ordered products are not in stock. This cost is calculated separately for each product. 2. Manufacturing volume costs –includes raw materials, direct labour, variable overhead, and the cost of production orders to replenish inventory. 3. Sales order costs –includes sales and administrative costs traced to a specific order. 4. Sales volume costs – includes all other sales and administrative 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 sales and administrative order costs. This was achieved by dividing the total sales and administrative costs by total number of orders executed, including both stocked and non-stocked orders. Step-2 : Calculate manufacturing order costs for non-stocked products.
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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 sales and administrative volume costs. This was achieved by first computing the ‘total volume costs’ by subtracting the sales and administrative and manufacturing order costs from ‘total manufacturing and sales and administrative costs’. Then sales and administrative volume related costs were divided by manufacturing volume costs of goods sold to drive at the ‘sales and administrative allocation factor’. Step-4
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Kanthal case study - 3. How does the new Kanthal 90 Account...

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