Analyzing Kanthal Company's Cost System And Customer Profits In An Essay.

Task One

The previous cost system used by Kanthal Company included the expenses incurred on administrative, sales and marketing. This implied that the selling price of the products exceeds the cost price, which eventually created profits for the company. On the other hand, when cost price including manufacturing costs and other expenses exceeded the selling price, the company faced losses. However, the company possess distinct sorts of customers with varied demands affecting its sales order, cost system and profitability as well. The main concern of this system was the barrier regarding appropriate measurement of profitability. It did not measured customers’ profitability on an individual basis. There might be a possibility to ensure hidden profits /costs, which eventually necessitates a system that can generate accurate information regarding such costs. The new cost system of the company should not take into concern production overhead, administrative and selling costs as fixed. Therefore, there is an urgent need for better provision of information about each and every order as well as product to determine the profitability level. Moreover, the costs that incurred by the company were mostly indirect in nature hence, through its previous cost system, it could not allocate such costs in an appropriate way.

Based on the given case information, the two main types of the customers of Kanthal included high-profit and low-profit. One of the characteristics of high-profit customers is that they buy standard/high-quality products. They place large scale of orders for their preferred products and do not demand any type of service neither commercial nor technical. Rather, they forecast product demands annually in a precise manner. On the other hand, low-profit customers demand particularly for commercial/technical services at a higher rate. They place low scale orders for low-margin products. They frequently order such products that are non-standard in nature.

After identifying the issues in the previous cost system, the company i.e. Kanthal opted a new system of account management known as ‘Kanthal 90.’ The intention of this new system is to overcome the barriers of the previous one. Therefore, the main feature of the new system is to analyze various costs such as administrative, sales and production precisely, which the previous system failed to perform. It is expected that the new system will be able to report the true costs of the company as well as the profits being generated from the products, the type of customers and the respective market positions. Therefore, with the use of this particular system, the company is likely to equally distribute its resources amongst distinct sorts of the customers and thereby attain predetermined targets within a specific timeframe.

Task Two

According to the case, it was observed after certain investigation and interviews that the top unprofitable customers were those who had been ordering largest orders. This implied that their sales volume was high, but they were unprofitable for the organization, which its previous cost system failed to trace. The reason for such unprofitability was that these customers had opted for just-in-time delivery process to supply the products. Moreover, the company did not recognize that one of these customers had pushed back the orders due to the implementation of this new JIT system. It was also found that another customer was using the company for only backing up the orders when its main suppliers could not place their orders on time. As per the case, the variation being observed in the ordering patterns of the customers was the sole reason to have hidden profits and losses. Hence, the ordering pattern must be such that the order size should be minimum and thereby making all its customers to be profitable. This can be done by changing the prices of the products according to the demands of the customers along with the usage of information technology. Therefore, in an overall basis, it should implement continuous changes intending to enhance quality of the products and develop ways to increase customer orders[1].

Observing the figures of Exhibit 8, which revealed the ranking of the customers from the most profitable one to the least, it can be stated that most of the customers were profitable. However, the customers who were unprofitable should be worked upon in order to turn them into profitable ones. The most essential improvement should be made to increase customer satisfaction, which will in turn enhance their loyalty towards the company. This will certainly increase their loyalty and thereby generate maximum profits[2]. Referring to Exhibit 9, the cumulative percentage of the customers and profits has been shown wherein cumulative profit decreased and the percentage of customers increased. Thus, based on this notion, it can be stated that even though the customers of the company have been growing extensively, their profit seems to diminish, which must be monitored constantly to retain them for a longer time and raise their loyalty at large. In terms of recommendations, the management team of the company can implement ABC analysis and based on the impacts imposed on the profitability level, the company can strategize future plans to retain them either by granting discounts or delivering additional services as per the requirement.

Task Three

As per the current market value of the facility given, the value of the network facility asset would be the summation of the determined value and residual value. Therefore, the total value of the asset would be ($300,000+$50,000) = $350,000. This implies that the asset is impaired because its market value is less than value listed. The decision of writing down the network facility asset to $300,000 depends on the company because it might create loss and fail to generate sufficient level of cash flow. Therefore, network facility asset has been acting as a part of the company’s assets hence, should not be written down.

According to Horton & Macve (2008), IASC was pursuing various proposals for the purpose of financial instrument accounting. The objective of the given article of Horton & Macve (2008) was to enhance fair value concept to solve the problems relating to measurement. Therefore, theory-based approach has been used for the purpose of value accounting. It was also observed that in the conceptual basis, fair value was inappropriate specifically because of the measurement issues. There were also other problems regarding recognitions and financial assets/liabilities. In a greater level, this concept was inadequate to recognize and measure the entire financial performance.  For instance, it did not yield the desired results while standardized accounting was used regarding life insurance. Thus, it can be affirmed that international standard of accounting was itself in crisis wherein appropriate structure is essential to be considered. There were also various controversies that have been highlighted in the article regarding the flaws in the accounting model, which created unfavorable conditions for International Accounting Standards Committee (IASC). Difficulties were also observed in value determination of assets because of the current system’s conceptual and practicality problems. Fair value was considered in order to facilitate exchange of assets within a market. Thus, understanding all the aspects, conclusion was drawn that there were problems regarding the preparation of income statement as well as balance sheet, according to which appropriate recommendations were made such as adopting special rules as per the requirements. Improvements can also be done as per ‘Relative Current Value Accounting’ to have a better progress and mitigate all the issues.

There is a need to calculate the impairment loss initially in order to prepare journal entries for impairment of assets. Thus, the impairment loss of the assets of Mace Ltd as on 30 June, 2015 is calculated hereunder.

Task Four

After the calculation of impairment loss, goodwill is subtracted to find the written off value of relevant assets, which must be included in the journal entry. The total written off value is $(28,000-12,000) = $16,000. Thus, net carrying amount is further calculated as:

Therefore, the required journal entry for Mace Ltd regarding the impairment of the assets is provided hereunder.

In order to prepare the journal entries for Mace Ltd at 30 June 2016 for reversal of the prior impairment loss, the carrying amount of the assets is calculated below.

After the calculation of actual carrying amount for both the assets, the next step would be to calculate the same without impairment loss.

The next step would be to calculate the difference between the actual carrying amount and when there is no impairment cost incurred, which is as follows:

Factory $ (144,000 – 130,857) = $13,143

Equipment $ (108,000 – 97,143) = $10,857

Therefore, total carrying cost is $ (13,143 + 10,857) = $24,000

Thus, the required final journal entry is prepared as:

The excess recoverable amount is observed to be $16,000 therefore; the reversal would vary according to the allocation of excess amount on carrying amount at the reversal. This can be explained in details below:

Therefore, the required journal entry would be:

Assuming recoverable amount of the factory to be $140,000, then the changes that will occur in the above calculations have been illustrated as follows:

For factory, the reversal of impairment would be $ (140,000 - 130,857) = $9,143

For equipment, reversal of impairment is $ (9,183 - 9,143) = $40

Therefore, the respective journal entry would be:

After preparing these journal entries, it can be observed that the allocation of equipment has not exceeded the carrying cost when the impairment is not made. Therefore, in this case, the calculation of equipment will have certain changes, as depicted below.

The 2008 financial crisis had various adverse effects that created complexities and controversies regarding accounting and related financial instruments. This crisis exposed the weakness of the accounting standards that used by the companies and even flaws regarding their appropriate application. This in turn reduced its credibility wherein preliminary difficulties were faced due to inappropriate application of ‘fair value’, delayed loss recognition, unbalanced financial structures and complexities regarding these standards. These complexities were particularly based on financial instruments in compliance with the accounting standards. This included the availability of multiple approaches for the purpose of assets impairment. Another complexity was observed with the usage of the off-balance-sheet standards, which had the possibility to incur obscured losses. Thus, it can be concluded that the impact of these accounting standards was pro-cyclic in nature however, there are some exceptions. As soon as these complexities and controversies are addressed and mitigated, economic growth as well as financial stability with increased transparency can be ensured (Alloway, 2009).

References

Alloway, T 2009, Accounting is semi-officially exonerated from causing crisis, The Financial Times, viewed 15 September 2017, <https://ftalphaville.ft.com/2009/07/28/64136/accounting-semi-officially-exonerated-from-causing-crisis/>

Cooper, R & Kaplan, Robert S 2017, Profit priorities from activity-based costing, Harvard Business School Publishing, viewed 14 September 2017, < https://hbr.org/1991/05/profit-priorities-from-activity-based-costing>

Hallowell, R 1996, ‘The relationships of customer satisfaction, customer loyalty, and profitability: an empirical study’, International Journal of Service Industry Management, vol. 7, no. 4, pp. 27-42.