May-2015
May-2015
May-2015
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FINANCIAL<br />
MANAGEMENT<br />
NOWADAYS, FEW TAKE RECOURSE TO ACTIVITY<br />
BASED CUSTOMER PROFITABILITY ANALYSIS. QUITE<br />
NATURALLY, THESE FIRMS ALLOCATE CUSTOMER<br />
RELATED EXPENSES ON AN ARBITRARY BASIS<br />
$ $<br />
Sales 4,45,000<br />
(-) Costs :-<br />
Manufacturing cost of 3,40,000<br />
Goods sold<br />
In-stock order<br />
Cost (15x $500) 7,500<br />
Out of Stock<br />
Order cost<br />
(25 x $ 1500) 37,500<br />
------------<br />
Total Costs 3,85,000<br />
------------<br />
Gross Margin 60,000<br />
========<br />
From the above, we note that Mr. X’s frequent purchase<br />
of out of stock items resulting in a big sales<br />
related costs.<br />
From the Customer Profitability Analysis, based on<br />
Sales for the previous year, Kanthal found that 40%<br />
of it’s customers were profitable and a further 10%<br />
lost 120% of the profits. In other words, 10% incurred<br />
losses equal to 120% of Kanthal’s total profits.<br />
Two of the most unprofitable customers turned out<br />
to be among the top three in total sales volume. These<br />
two customers made many small order of out of stock<br />
items.<br />
The Kanthal Case study showed how Customer<br />
Profitability Analysis can be used to identify unprofitable<br />
customers. The firm should persuade unprofitable<br />
customers to modify their buying behavior away<br />
from placing numerous small order and/or purchasing<br />
non standard items. If the firm fails to persuade<br />
these customers to modify their behaviors, it should<br />
increase the selling prices to cover up extra resources<br />
consumed. The above Activity Based Analysis, highlighted<br />
the need to focus on reducing ordering costs<br />
and the cost of handling nonstandard items.<br />
It would be wrong to conclude that we need to<br />
drop all customers showing negative gross margin,<br />
following Kanthal Case study. For example, some customers<br />
may be willing to change their buying behavior<br />
away from numerous small orders of out-of-stock<br />
items or some customer may be willing to pay extra to<br />
maintain their correct buying pattern or unprofitable<br />
customers of today may become profitable customers<br />
tomorrow, when they may order in larger volume.<br />
Now a days, almost all prudent firms analyze profits<br />
by customers but few take recourse to Activity Based<br />
Customer Profitability Analysis. Quite naturally, these<br />
firms allocate customer related expenses on an arbitrary<br />
basis. Activity based Customers Profitability Analysis<br />
help in revealing that customers with the same sales<br />
value can generate significantly different profits. Accordingly,<br />
Activity Based Customer Profitability Analysis<br />
provide scope for developing a more market oriented<br />
approach to management accounting.<br />
Bibliography<br />
1. Bellis – Jones, R.(1989) Customer Profitability Analysis,<br />
Management Accounting, February, 26-28.<br />
2. Berliner, C and Brinson, J.A.(1988) cost Management<br />
for Today’s Advance Manufacturing, Harvard Business<br />
School Press.<br />
3. Bromwich, M and Bhimani, A. (1989) Management<br />
Acounting : Evolution not Revolution, Chartered Institute<br />
of Management Accountants.<br />
4. Cooper, R and Kaplan, R.S. (1988) Measure costs<br />
right: make the right decisions, Harvard Business Review,<br />
September/ October, 96-103.<br />
5. Dearden, J. (1978) Cost Accounting comes to service<br />
industries, Harvard Business Review, September/<br />
October, 132-40.<br />
pramit.sg@gmail.com<br />
54 the MANAGEMENT ACCOUNTANT MAY <strong>2015</strong><br />
www.icmai.in
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