What was the Kanthal president, Ridderstrale, attempting to accomplish with the

Account Management System? Are these sensible goals? Why or why not? The motivat
ion for Carl-Erik Ridderstrale, president of Kanthal, to develop an Account Mana
gement System was to find a process of determining the profitability of individu
al customer orders. An accurate account measurement system was needed in order t
o achieve a strategy for increasing growth and profitability without adding a si
gnificant amount of sales and administrative resources to handle anticipated inc
reased sales. In order to carry out this strategy, a system was needed to alloca
te overhead expenses to the different categories of customers as well as product
s. 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 impor
tant that effort was taken to ensure that variable selling, general, and adminis
trative (SG & A) costs did not increase faster than sales revenue. As Kanthal ex
panded operations and increased their market share, they captured business by me
eting their customers' expectations for increased service. Increased demands wer
e placed on their production and order-handling processes due to the JIT approac
h adopted by two of Kanthal's top customers in terms of total sales volume. It w
as also determined that one of these customers was actually using Kanthal as a s
upplier for small special orders of a low-profit item when their main supplier c
ould not deliver. (Bruns, 1998) While this type of service created value for spe
cific customers, it came at a high cost. In order to remain profitable, the comp
any had to find a way to raise profit margins for customers they identified as r
equiring special services or transition to a low cost strategy. Ridderstrale's s
trategy was to redirect their efforts to customers they identified with hidden p
rofits 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 hig
her profit level. Why did Ridderstrale feel that the previous cost system was in
adequate 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 administra
tive 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 con
sidered fixed costs that could not be manipulated or changed to influence profit
ability. These expenditures were treated as period costs and allocated as a perc
entage 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 cer
tain customers historically placed significant demands on the company's administ
rative and sales staff. Hidden costs associated with customers placing special o
rders or those requiring frequent small shipments were not apparent since data d
id 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 cus
tomers 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 valueadded services that were not billed. Thus,
under the previous system, costs were allocated evenly to all types of customer
s based on sales revenue without a true and accurate contribution margin known f
or 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 (2
0% of customers were generating 225% of profits.) Approximately 70% of their cus
tomers fell in the break-even area, and 10% of their customers were losing 125%
of profits. (Internet, www.managersart.com/chap.11to20/chap11.htm) 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 Kantha
l plan involved determining where and how employees could be repositioned into m
ore profitable areas to generate future growth. A strategic plan was formulated
to determine how to best move employees from the corporate staff office to funct

ions in sales, R&D, and production. (Bruns, 1998) Under the Kanthal 90 Account M
anagement system, overall profit objectives were specified by division, product
line, and market. The design of this activity-based cost system focused on incre
asing profitable activities and eliminating or decreasing the unprofitable ones.
The new system was designed to measure the true costs of individual customer or
ders 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 sy
stem for analyzing production, sales, and administrative costs at the Hallstaham
mar plant. Information was solicited from various key employees assigned to a pr
oject team to determine the true nature of activities and a description of the e
vents which triggered demands for these activities in each department. As a resu
lt of these extensive interviews, a new cost allocation method based on the conc
ept of activity-based costing was developed that identified costs as either orde
r 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 t
o sales volume and production and how much related to handling individual produc
tion and sales orders. Under the Kanthal 90 system, four new components were cre
ated to accurately determine true costs: 1. Manufacturing volume costs 2. Manufa
cturing 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 fo
ur 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 div
iding the total cost for these items by the number of orders for non-stocked pro
ducts. The S&A allocation factor was then determined to calculate S&A volume rel
ated costs and applied to manufacturing costs of goods sold (CGS). The final ste
p involved calculating operating profit on individual orders for nonstocked item
s. This step required subtracting volume related costs from sales revenues follo
wed by subtracting manufacturing and S&A order costs from the resulting gross ma
rgin to determine the operating profit for the order. (Bruns, 1998) A limitation
of the system that could impact its effectiveness would be the amount of time r
equired 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 stocke
d 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 sh
ould Ridderstrale do about the two large unprofitable customers revealed by the
account management system? Use of the Kanthal 90 account management system provi
ded 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-p
ricing can be agreed upon, a new sales mix can be established that makes fewer d
emands on resources or generates more revenue with the same consumption of resou
rces. (Kaplan & Narayanan, 2001) Ridderstrale must approach their two largest cu
stomers in negotiating a change in the manner they are doing business. To encour
age a change in customer behavior, results from the new account management syste
m 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, t
hey 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, sel
ective price changes should be implemented depending on volume or special order
needs. Additional guidelines should be established to incorporate an activity-ba
sed pricing feature that would include a surcharge for any change made to existi
ng orders. A minimum order size should be established as well with a set surchar
ge if not met. Conclusion Development of the Kanthal 90 Account Management Syste
m 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 n
eeded to make strategic decisions. However, it is important that the system is m
onitored 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, , www.managersart.com/chap.11to20/chap11
.htm Kaplan, R. S., & Narayanan, V.G. Customer Profitability Measurement and Man
agement. Harvard Business Press., 2001 Kaplan, Robert S., The ABCs of Accounting
for Value Creation. Planning Review. Chicago. July/Aug 1990 Vol. 18 Iss 4 Marsh
all, David H. & McManus, Wayne W. Accounting: What the Numbers

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