kanthal case study solution

Accounting & Information Management Kanthal Case Study PGPBABI3 - Group 4 •

Arnab Majumdar

•

Kanthimathi Gayatri Sukumar

•

Manoj

•

Jawahar Sukumar

•

Ramanathan Gangadharan

•

Gummaraju B Manjunatha

Cost comparison for non-stocked products under Traditional Vs Activity-based Costing In the traditional method, the order cost and stock out cost were unaccounted for leading to perceived lower cost than actual. This resulted in inflated profit margin calculation. Example, for #33537, per traditional system, the profit margin is 58%, but in reality (as per the new activity based costing system), the profit margin is only 12%. Costing system

Invoice Sales

Volume Costs

Order Costs

Non-stocked Costs

Operating Profit

Profit Margin %

Activity Based

155,793

65,718

21,750

49,450

18,875

12

Current System

155,793

65,718

NA

NA

90,075

58

Causes of discrepancies (Exhibit No. 7) Order Costs and Non-Stocked Cost were earlier not tracked resulting in discrepancies. Example: 1.

For low volume customers like #33523 and #33509 the Invoiced Sales are very low compared to the Order cost and Non-Stocked cost resulting in significant losses.

2.

2 of the high volume customers had high order frequency (#33519) leading to high Order cost and Custom orders (#33537) resulting in high Non-Stocked Cost as a % of sales. A higher profit margin opportunity was thus missed. For these customers, reducing the order frequency (by offering volume discounts) and being in stock and could have avoided this.

Resolution for unprofitable products (or customers) 



For unprofitable customers with high order frequency 

high volume - offer discounts for decreased frequency and bulk orders.



low volume - use discriminatory pricing / enforce minimum order quantity.

For unprofitable customers with high stocked-out cost 



Apply surcharges to accommodate non-stocking cost.

Trim product mix to remove products with negligible / negative contribution to profit margin.

Thank You