Managerial Accounting, Article Critique Example

For this article, I looked in the library through a number of prospective magazines. I finally decided on choosing an article related to the intersection between managerial accounting and customer management. The article’s title is: When to drop an unprofitable customer? This article was published as a part of the May 2012 edition of the Harvard Business Review.

This article focuses on the implications that emerge from cost accounting; the article’s analysis is related to a case study that examined the following problem. Egan and Sons, a fictional producer of staircases and door accessories, changed its accounting system after margins shrunk with the intensification of Chinese competition at the bottom end of the product range. As a result, the company chose to change its accounting system from a standard costing system, which aggregates costs over divisions and certain product lines, to an activity-based costing system that allows the firm to see the cost of producing for each customer. The new accounting system showed that a traditional customer of Egan and Sons was simply not worth it: the cost of producing bespoke doors and luxury door accessories was actually costing the company more than it was bringing in through revenue. The switch from typical cost accounting to activity-based accounting allowed the firm to see this loss.

Overall, the article provided a compelling account of how one company’s strategy changed after switching to activity-based costing. Activity-based accounting allowed the company to see that while margins might have been robust for certain product lines that belonged to the customer, the customer’s account was actually hurting the firm through excessive demands and transportation costs. This is one reason why an increasing number of manufacturing firms are transitioning away from traditional accounting systems to ones based on cost.

Sources:

Kaplan, R. (2012). When to drop an unprofitable customer. Harvard Business Review.