What was the Khantal president attempting to accomplish with the Account Management
System? Are these sensible goals?
The president wanted to move away from their traditional financial accounting categories,
they wanted to classify organizational costs as Order related or Volume costs. He wanted to
allocate resources so that we could increase profits while maintining a return on employed
capital in excess of 20%. They were indeed sensible goals, the president wanted to increase
profitability by individually listing and measuring the cost of each activity and focus on
those that were most profitable for Khantal.
Why did Riddestrale feel that the previous cost system was inadequate 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?
Because the previous cost system did not clearly allocate how much of the expenses of
each support department related to the volume of sales and production nor how much was
related to the handling of individual production and sales orders. There could be a hidden
profit only 20% of Khantal products were stocked in inventory, but these products
represented 80% of sales orders so the cost of continually replenishing these products was
assumed to be correlated with the actual output of production. A customer that costs are
implemented with improper accounting systems could be reflected as profitable, when it