May-2015

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FINANCIAL MANAGEMENT A MANAGEMENT ACCOUNTING TOOL TO ANALYSE PROFITS BY CUSTOMERS Activity-based Customers Profitability Analysis help in revealing that customers with the same sales value can generate significantly different profits. Accordingly, Activity-based Customer Profitability Analysis provide scope for developing a more market-oriented approach to management accounting CMA Jayanta Mitra Professor of Accounting Higher College of Technology Sultanate of Oman Pramit Sengupta Assistant Professor Army Institute of Management Kolkata IN the past, Management Accountants used to analyse profits by products. The scenario charged after Cooper and Kaplan emphasized in their Article [Copper R. and Kaplan, R.S.(1988) Measure Costs right : make the right decisions – Harvard Business Review, September/October 96-103] the need to analyse profits by customers, using and activity based costing approach, which is quite relevant in the present competitive scenario, where managers are faced with key strategic decisions. Customer Profitability Analysis provides vital information and can be used to determine which classes of customers should be emphasized, or deemphasized and the price to charge for customer service. Cooper and Kaplan, used “Kanthal” – a Harvard Business School Case Study, to trace the merits of Customer Profitability Analysis. Kanthal is a Swedish Company that sells electric heating elements. Kantha’s selling costs, related to customers, account for 34% of its cost structure. In the past, Kanthal used to allocate the above mentioned costs on the basis of sales (in dollars) of each customer. However recently the management of Kanthal decided to allocate these costs by analyzing the activities required to service customers. Kanthal conducted a detailed customer profitability study and the study revealed two cost drivers :- i) Number of orders placed: Each order had a large fixed cost which did not vary with the quantity of items purchased. A customer who ordered 1000 units per month in 10 orders of 100 units, generated 10 times more ordering cost than a customer who placed a single order of 1000 units. ii) The availability of the ordered item “in stock”: Kanthal incurred extra cost to produce 52 the MANAGEMENT ACCOUNTANT MAY <strong>2015</strong> www.icmai.in
ordered item which was not in stock. Kanthal made estimates of the per order cost (Say $ 350), the cost of handling in-stock item (say $ 150) and the cost of handling and out of stock item (say $ 1150). On the basis of the above estimates, Kanthal’s Sales related cost for an in-stock order was $ 500 ($ 350 + $ 150) and the sales related cost for and out of stock order was $ 1500 ($350 + $ 1150). The above mentioned cost figures were assumed to be purely variable in nature. Kanthal tried to ascertain Gross Margin earned for each customer in the most recent years. Let us consider, Mr. X, a customer of Kanthal, who used to 40 orders to purchase $ 4,45,000 of goods with a manufacturing cost of $ 3,40,000. The 40 orders, can be broken up in 15 orders for in-stock items and 25 orders for out of stock items. The Gross Margin of Sales of Mr. X the customer is calculated below:- www.icmai.in MAY <strong>2015</strong> the MANAGEMENT ACCOUNTANT 53
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