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